The Nonprofit's Dilemma
20 Pages Posted: 1 Sep 2021
Date Written: July 23, 2021
Nonprofit firms producing services that are of broad public concern — mission-driven organizations — pay lower wages and often use low-powered incentive schemes, which has been explained by binding financial constraints and the threat to attract wrong worker types if wages are increased. Yet, they face higher labor turnover than for-profit firms, which is very costly. We construct a simple model that reproduces these stylized facts, explains the high labor turnover of mission-driven organizations, and suggests a way out of this nonprofit’s dilemma, based on insights from the economic psychology literature. We construct testable empirical hypotheses and offer managerial and policy implications.
Keywords: intrinsic motivation, altruism, beliefs, nonprofit, nonprofit sector, NGOs, charities, self-deception
JEL Classification: L31, J31, D64, D91, M51
Suggested Citation: Suggested Citation