THE DARK SIDE OF TRANSPARENCY: MISSION VARIETY AND INDUSTRY EQUILIBRIUM IN DECENTRALISED PUBLIC GOOD PROVISION

Abstract

We study the implications of transparency policies on decentralised public good provision by the non-profit sector. We present a model where imperfect monitoring of the use of funds interacts with the competitive structure of the non-profit sector under alternative informational regimes. Increasing transparency regarding the use of funds may have ambiguous effects on total public good provision and on donors’ welfare. On the one hand, transparency encourages all non-profit firms to engage more actively in curbing fund diversion. On the other hand, it tilts the playing field against non-profits facing higher monitoring costs, pressing them to give up on their missions. This effect on the extensive margin implies that transparency policies lead to a reduction in the diversity of social missions addressed by the non-profit sector. We show that the negative impact of transparency on social mission variety and on donors’ welfare is highest for intermediate levels of asymmetry in monitoring costs.