NGO Competition and the Disclosure of Cost Information

Abstract

Non-governmental organizations (NGOs) compete in the market for donations through fundraising activities. Commonly, NGOs are hesitant to disclose their fixed costs. In line with research in accounting and economics on disclosure, this paper asks if NGOs that engage in fundraising activities to elicit donations have strategic reasons (not) to disclose information about their fixed costs to rival NGOs. Investigating the voluntary (ex ante) disclosure policies of competing NGOs, I find that the optimal disclosure policy strongly depends on information spillovers, fundraising spillovers, and the donors' assessment of their donations to the two NGOs' projects. If donors perceive their donations as strong substitutes or if fixed cost information of one NGO is not too informative about the rival NGO's fixed costs, then disclosure is a dominant strategy for NGOs. This equilibrium choice of disclosure policies also maximizes welfare in the majority of cases. If donors perceive their donations as weak substitutes or complements and fixed cost information of one NGO is sufficiently informative about the rival NGO's fixed cost (i.e., the correlation between the cost signals is sufficiently high), then a no disclosure policy is adopted in equilibrium. In this situation, the no disclosure choices maximize welfare if the correlation between cost signals is
sufficiently high, but not too high. Since welfare is maximized in the majority of cases if disclosure decisions are delegated to the competing NGOs, interventions of a regulatory authority would either be moot or decrease welfare.

Keywords: Nongovernmental organization, Fundraising competition, Disclosure, Cost information