Small is beautiful: Motivational allocation in the nonprofit sector

Abstract

We build an occupational-choice general-equilibrium model with for-profit firms, nonprofit organizations, and endogenous private warm-glow donations. Lack of monitoring on the use of funds implies that an increase of funds of the nonprofit sector (because of a higher income in the for-profit sector, a stronger preference for giving, or an inflow of foreign aid) worsens the motivational composition and performance of the nonprofit sector. We also analyze the conditions under which donors (through linking donations to the motivational composition of the nonprofit sector), nonprofits themselves (through peer monitoring), or the government (using a tax-financed public funding of nonprofits) can eliminate the low-effectiveness equilibrium. We present supporting case-study evidence from developing-country nongovernmental organization sector and humanitarian emergencies.