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Team Incentives and Organizational Form
Abstract
Conventional wisdom regarding nonprofit firms is that they are inefficient, due to the absence of a profit motive. However, the costs and product quality realized by profit-taking firms is determined by how well those firms deal with a host of internal incentive and information issues. A similar approach to the study of nonprofit organizations has not been attempted. This paper undertakes such an investigation, centered on the problem of providing incentives for members of a team to provide efficient effort. Holmstrom(1982) showed that the introduction of a budget-breaker, or principal, into a team allowed for the provision of such incentives where it would otherwise be impossible. A similar result obtains for a nonprofit team, but the role of principal differs from that found in profit-taking teams. It is shown that any of; donors, government regulators, or Trustees can fulfill this role in a nonprofit team. One implication of this is that nonprofit firms may indeed pay employees less...
... In the model presented here, the monitoring parameters are assumed to be common knowledge. Slivinski (2002) has pointed out that conflicts of interests can even exist in nonprofit firms. Either, the agents are motivated by an output contingent payment. ...
... s Andersen who has improved my usage of the English language. however, did not induce the theoretically predicted responses by the monitored agents. This effect is due to the lack of information on the side of the agents, who had to infer the monitoring rate. In the model presented here, the monitoring parameters are assumed to be common knowledge. Slivinski (2002) has pointed out that conflicts of interests can even exist in nonprofit firms. Either, the agents are motivated by an output contingent payment. Or the monitoring of inputs, combined with punishment for shirking, is introduced to avoid undesired behavior. Since the seminal papers of Alchian und Demsetz (1972) and Holmstrom (1982) the pr ...
This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political autonomy of the central banks in emerging market and developing countries. Our analysis confirms that greater CBA has on average helped to maintain low inflation levels. The paper identifies four broad principles of CBA that have been shared by the majority of countries. Significant differences exist in the area of banking supervision where many central banks have retained a key role. Finally, we discuss the sequencing of reforms to separate the conduct of monetary and fiscal policies. IMF Staff Papers (2009) 56, 263–296. doi:10.1057/imfsp.2008.25; published online 23 September 2008
... In spite of its logical appeal, resource-dependency theory has increasingly been subject to criticism. Opponents argue for instance that profit-seeking behavior contradicts the moral adherence to nonprofit social goals (Forster & Bradach, 2005;Guo, 2006;Slivinski, 2002), and can disengage nonprofits from moral philanthropism, by inducing mission drift and loss of idealism (Hung & Berrett, 2023;Maier et al., 2016). As financiallyrewarding activities gain precedence over altruism, there is a high risk of crowding out original objectives in preference for pecuniary ones (Beisland et al., 2019;Vaceková et al., 2017;Yu & Chen, 2018), and excluding clients who are unable to pay for services (Hung & Berrett, 2023). ...
Business‐like thinking among NPOs and scholars has stimulated growing but contested views on what constitutes commercialization and what drives its adoption. Unfortunately, empirical efforts have largely neglected the perspective of nonprofit managers who play pivotal roles in commercialization decisions. To stem this knowledge gap, this study applies a mixed methods on a case study from Cameroon to elicit top nonprofit managers' perceptions to commercialization. Almost 90% of all top managers demonstrate sound theoretical knowledge of nonprofit commercialization. Overall, 65% perceived commercialization positively, and 40% were already engaged in commercial activities. Binary logistic regression results indicated positive and statistically significant relationships between organizational capacity variables (intervention sector, for‐profit management strategy, and assets), and managers' perceptions of nonprofit commercialization ( p < 0.05), questioning the resource‐dependency theory. The implications of conceptual ordering, theoretical diversity and contextualizing research on nonprofit managers' commercialization perceptions are discussed, particularly the need to include managerial perception as a key variable in the nonprofit commercialization equation in developing countries, and reconciling theoretical contestations with contextual reality.
... Although the application of agency theory is widespread throughout the literature on the for-profit sector, little consensus seems to exist on the applicability of classical agency theory in the case of non-profit organizations [10], [11] and it is not yet commonly used to describe labour relations in non-profit organizations. Still, as [12] notes, there is no basis to think that non-profit organizations are spared from "moral hazard, opportunism, adverse selection and other problems of asymmetric information". Agency theory framework can be applied to nonprofit organizations if some peculiarities of this sector are taken into consideration as shown several empirical and theoretical studies [11], [13], [14], [15], [16], [17]. ...
... Secondly, nonprofit entrepreneurs may resort to rent-seeking behavior, unless appropriate monitoring and incentive systems are developed. A mixture of financial and non-financial incentives is probably the best way to motivate nonprofit entrepreneurs under these circumstances [33]. Thirdly, a conflict of interest and distrust may emerge between nonprofits and their target groups, if the latter provide the market for profit-oriented goods of the former. ...
The importance of the nonprofit sector in enhancing sustainable development especially in developing countries where states and markets often fail is generally recognized in the literature on organizational behavior and development. The rapid growth observed in this sector has been accompanied by increasing volatility of charity and philanthropy, perverse global shocks and institutional arrangements. These factors threaten the financial sustainability of the nonprofit sector as well as its constant contribution to sustainable development especially in developing countries. This paper proposes an extension of the concept of nonprofit commercialization to developing countries, which until now has claimed significant importance only in the developed countries nonprofit literature. The key hypothesis developed in this paper is that commercialization of nonprofit organizations in developing countries can significantly reduce the risk of financial insolvency, enhance organizational sustainability and long term contribution to sustainable development. The importance of nonprofit organizations and rationale for commercialization of third sector organizations in developing countries is presented. The pros and cons for nonprofit commercialization are intensively discussed before proceeding to some of the key motivating factors for nonprofit commercialization. An empirical example is briefly presented to support this theoretical position. The paper concludes with implications of concept application for research, development and sustainability of the nonprofit sector in developing countries.
... But Slivinski (2002) showed that provision of dividends-in-kind, worker enjoyment of the collective output of the firm, can be the most efficient way to motivate team production by workers. True, nonprofit directors do not have pecuniary incentives to instill efficiency in the organizations they control. ...
I argue that social investors should invest in activities that cannot be reliably sustained through ordinary market transactions. These activities include collective consumption goods, goods with nonverifiable quality, merit goods, and private goods that target groups cannot but ought to be able to, afford. Then I consider government's role in social investment. Most of the paper is devoted to choice of investment targets across institutional forms – for-profit, nonprofit, and hybrid organizations. Nonprofits and for-profits have distinct advantages and disadvantages, and either might be the best home for specific kinds of social investment. In contrast, I am skeptical of the claimed benefits of hybrid organizations and structures. I argue that LLCs (Limited Liability Companies), L3Cs (Low-profit Limited Liability Companies), CICs (Community Investment Corporations), B corporations, Benefit corporations, and Social Impact Bonds lose the efficiency advantage of traditional for-profits and do not enhance access to capital over the nonprofit form. In addition, hybrids suffer from contract failure and some of the hybrid forms will have difficulty sustaining their social mission. Social investors should avoid existing forms of hybrid organization.
... Steinberg (1987), on the other hand, argues that when informational asymmetries exist between sellers and buyers concerning the quality of a product, the aim to maximize profits may stimulate agents to mislead consumers, while the nondistribution constraint will not. Finally, Slivinski (2002) shows that nonprofit organizations can indeed attain an efficient effort and production level when their output includes a public good. In the second argument, Phelan (1993) and Metzger and Dalton (1996) even weakened the assumption of the absent principals by stating that nonprofit organizations are often more attached to their constituents than their for-profit sector counterparts. ...
This article provides an overview of the literature on nonprofit principal-agent relationships. It depicts the nature of agency theory and stewardship theory, analyzes the origin of their struggle within the nonprofit structure, and marks directions for a conciliatory approach. We open with an introduction to agency theory and discuss the two main components of its mathematical branch. We thereby contrast it with stewardship theory and elaborate on the arguments that can affect the position of nonprofit principal-agent relationships on the stewardship-agency axis. Analysis of the existing literature points to a lack of consensus as to which theory should be applied. We argue that the division of nonprofit principalagent relationships into board-manager and manageremployee interactions may help to clarify the balance between agency theory and stewardship theory and may lead to the establishment of a strongly founded theory on nonprofit principal-agent relationships. We close with a discussion of how this article may prove valuable to nonprofit policymakers and other empirical researchers.
... Agency theory assumes an extrinsic motivation of managers, while stewardship theory claims the opposite in terms of non-monetary aspects such as opportunities for growth, achievement, affiliation, and self-actualization. Thus, managerial approaches to CSO governance most likely correspond to the assumptions of agency theory emphasizing the similarities in motivation structure and information asymmetries between for-and non-profit environments (e.g., Glaeser 2003; Jegers 2009; Miller-Millesen 2003; Slivinski 2002). In contrast, more mission-driven CSO management concepts highlight how third sector organizations are fundamentally different from the for-profit world, assuming an involvement-oriented environment and managers that are highly motivated by the mission of the organization. ...
How can the internal governance of civil society organizations be conceptualized more adequately by accounting for the dual and simultaneous requirements of controlling and coaching in board behavior? Empirically, we seem to agree that effective governance of a civil society organization is crucial to its sustained viability. Conceptually, however, we observe a lack of consensus on how to best understand CSO governance. By critically juxtaposing two major theoretical lenses to conceptualize governance, namely, agency and stewardship theory, we identify a number of challenges when dealing with board-management relations that deserve our attention. While agency theory privileges controlling behavior, stewardship theory emphasizes the coaching behavior of boards. The purpose of this article is to offer a concept of governance that is informed by a paradox perspective advancing a subtler, more adequate conceptualization of board governance that accounts for these often conflicting demands on CSO governance. Drawing on illustrations from a longitudinal interpretive case study, we exemplify our propositions empirically. The article concludes with discussing the implications of our argument for CSO governance research and practice.
... If the chance to contribute, through one's job, to a public good is a utility-relevant job attribute, then public good provision becomes an automatically-shared stimulus to efficiency. Thus, Slivinski (2002) shows that by using a combination of public goods and private goods that is legal under any interpretation of the nondistribution constraint, there exists a compensation scheme that induces optimal effort from each team member. This scheme requires knowledge of only observable team output, is budgetbalancing , and renegotiation proof. ...
In this chapter, we explore why donations are made to nonprofit organizations instead of other institutions or directly to recipients; how such nonprofit organizations behave; and what is the appropriate public policy toward subsidizing and regulating these entities. We focus on donative nonprofits—organizations precluded from distributing their surplus revenues to those in control that receive resources in the forms of donated time and money and tend to provide private pure, distributional, or excludable public goods. First, we discuss the definition of a private nonprofit organization and delineate some immediate corollaries and consequences of that definition. Next, we summarize the dimensions of the nonprofit sector—size, scope, and revenue mix—for various countries around the world. Third, we discuss various models of the role and behavior of donative nonprofit organizations. Finally, we discuss some specific behaviors of nonprofit organizations—the ways in which they conduct fundraising campaigns, set prices, employ labor, and use capital.
... Agency theory assumes an extrinsic motivation of managers, while stewardship theory claims the opposite in terms of non-monetary aspects such as opportunities for growth, achievement, affiliation, and self-actualization. Thus, managerial approaches to CSO governance most likely correspond to the assumptions of agency theory emphasizing the similarities in motivation structure and information asymmetries between for-and non-profit environments (e.g., Glaeser 2003; Jegers 2009; Miller-Millesen 2003; Slivinski 2002). In contrast, more mission-driven CSO management concepts highlight how third sector organizations are fundamentally different from the for-profit world, assuming an involvement-oriented environment and managers that are highly motivated by the mission of the organization. ...
... 6. Alchian and Kessel (1962) is an early analysis of this, but see Slivinsky (2002), who shows that the nonprofit form of organization can be optimal in certain circumstances. ...
This article investigates theoretically and empirically the effects of competition for donors on the behavior of nonprofit organizations. Theoretically, we consider a situation in which nonprofit organizations use donations to produce some commodity, but the use of donations is only partially contractible. The main results of the model indicate that an increase in competition (i) decreases the fraction of donations allocated to perquisite consumption and (ii) increases the fraction of donations allocated to promotional expenditures. Moreover, the effects of competition are magnified by the ability to contract on the use of donations. These hypotheses are tested with data on the expenditures of nonprofit organizations in a number of subsectors where competition is primarily local. We use across--metropolitan statistical areas' variation to measure differences in competition and proxy contractibility by the importance of tangible assets, which are more easily observed by donors. The estimated effects of competition and contractibility are consistent with our model. The Author 2007. Published by Oxford University Press on behalf of Yale University. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
We study optimal team design. In our model, a principal assigns either heterogeneous agents to a team (a diverse team) or homogenous agents to a team (a specialized team) to perform repeated team production. We assume that specialized teams exhibit a productive substitutability (e.g., interchangeable efforts with decreasing returns to total effort), whereas diverse teams exhibit a productive complementarity (e.g., cross-functional teams). Diverse teams have an inherent advantage in fostering desirable implicit/relational incentives that team members can provide to each other (tacit cooperation). In contrast, specialization both complicates the provision of cooperative incentives by altering the punishment agents can impose on each other for short expected career horizons and fosters undesirable implicit incentives (tacit collusion) for long expected horizons. As a result, expected compensation is first decreasing and then increasing in the discount factor for specialized teams, while expected compensation is always decreasing in the discount factor for diverse teams. We use our results to develop empirical implications about the association between team tenure and team composition, pay-for-performance sensitivity, and team culture.
This paper was accepted by Brian Bushee, accounting.
This article combines research on incentives with nonprofit organization theories to derive three "nonprofit characteristics" that influence the use and effectiveness of incentive mechanisms in nonprofit organizations: the lack of undistorted contractible measures for the organization's overall performance, the relevance of identified employee motivation and the social relationships between the organization and its stakeholders. Building on research from social psychology, the article argues for a more deliberate use of implicit (i.e., not contractually defined) incentives rather than a shift toward the increased use of performance contracts. Because implicit incentives are often subtle (without the need of formal justification to others) and emergent rather than planned, managers are frequently not aware of these mechanisms, and their deliberate use creates a major challenge.
This article investigates theoretically and empirically the effects of competition for donors on the behavior of nonprofit
organizations. Theoretically, we consider a situation in which nonprofit organizations use donations to produce some commodity,
but the use of donations is only partially contractible. The main results of the model indicate that an increase in competition
(i) decreases the fraction of donations allocated to perquisite consumption and (ii) increases the fraction of donations allocated
to promotional expenditures. Moreover, the effects of competition are magnified by the ability to contract on the use of donations.
These hypotheses are tested with data on the expenditures of nonprofit organizations in a number of subsectors where competition
is primarily local. We use across–metropolitan statistical areas' variation to measure differences in competition and proxy
contractibility by the importance of tangible assets, which are more easily observed by donors. The estimated effects of competition
and contractibility are consistent with our model.
This article gives a concise review of the literature on non-profit boards. Given the lack of theoretical work on the subject, the focus of the article lies on the empirical work. This empirical work seems to have developed on two roads: one where the non-profit board is the dependent variable and one where the non-profit board is an independent variable in relation to other variables such as organisational performance. As this article will show, these empirical results often remain equivocal and consensus is lacking. The authors argue that a better insight in the composition and structure of the non-profit boards can contribute a lot to the understanding of the behaviour of non-profit organisations.
Detecting agency problems is an important task when assessing the effectiveness of a nonprofit organization's governance. A first step is to examine the objectives of principals and agents and determine whether there is a systematic difference between them. Using a discrete choice experiment, we identify the objectives of board chairpersons (principals) and headmasters (agents) of Flemish nonprofit schools. We find systematic differences between the two groups. Of the seven possible objectives set out in the experiment, six are relevant for both headmasters and board chairpersons. For four of these, the preferences of both groups differ significantly. Whereas ideological values play an important role for both the board and the headmaster, they are significantly more important for the board. Both parties dislike having a large number of pupils, and the disutility is larger for the board. With respect to job satisfaction and pupil satisfaction, we find the opposite: while the board is prepared to give up pupil and job satisfaction in favor of the other objectives, these two objectives score very high on the priority list of the headmasters.
This paper studies how the ownership of a project affects the investment incentives of different parties, when the project generates non-excludable bene-fits. The main application is a conservation project, where a conservation NGO and a governmental agency make non contractible investments, which generate an opportunity cost that has to be paid to a third party, typically a local com-munity, in order to prevent her from destroying the value of the public project. It is shown in this context that, contrary to the result of Besley and Ghatak (2001), it is not always true that the project should be granted to the most caring party. In some cases, granting ownership to the least caring party allows both parties to tie their own hands and leads them to maximize their invest-ments. These results have some implications for studying the respective roles of governmental agencies, NGOs and local communities in the management and ownership of conservation concessions, which are an increasingly used tool for conservation in developed as well as developing countries. The insights of the model are applied to a conservation concession project on a communal forest in East Kalimantan, Indonesia. 1 I am grateful to my advisor Paul Seabright, and to Bruno Jullien, Antoine Loeper and Micha Drugov for helpful comments. I thank CIFOR, and particularly Patrice Levang and Sven Wunder, for hosting an internship during summer 2003. Many thanks also to Charles Kole, Ramses Iwan and Rinda Sandayani Kharab.
This synthetic literature review briefly summarizes general literature on principal–agent problems, then shows how this literature has been or can be adapted to look at nonprofit governance, accountability, and performance. It concludes with discussions of differences between agency problems in the for-profit and nonprofit sectors and difficulties in developing normative theories of accountability. Nonprofit organizations should be accountable to their legitimate stakeholders. Of course they should. This proposition seems so obvious that public regulators, watchdog agencies, major funders, and nonprofit managers use it every day, despite the vacuous nature of the statement. What does accountability mean? Who is a legitimate stakeholder? What if stakeholders disagree? The form of the statement suggests substance, lending legitimacy to thin arguments. For example, some implicitly replace “legitimate stakeholders” with a single category, privileging, say, donors. Then they assert something like “donors want fundraising costs to be as low as possible”, so that a high-cost charity lacks accountability. That argument seems sensible until one remembers that donors are not the only class of stakeholders, and that other mission-critical stakeholders (like indigent clients) might be harmed if fundraising costs (and hence revenues) are too low. Another example, familiar to many readers, is a nonprofit university. The list of arguably legitimate stakeholders here is staggeringly long: students, faculty, staff, administrators, donors, alumni, sports fans, private foundations, local tax authorities, for-profit research partners, employers, curators, politicians, advocates, and undoubtedly others.
The 1/n problem potentially limits the effectiveness of profit sharing in motivating workers. While the economic literature suggests that reciprocity can mitigate this problem, it remains silent on the optimal degree of reciprocity. We present a representative model demonstrating that reciprocity may increase productive effort but may also increase unproductive effort such as socializing on the job. The model implies that reciprocity increases profit up to a point but decreases profit beyond that point. Using detailed survey measures of worker reciprocity, we show that the probability of receiving profit sharing takes an inverse U-shape as reciprocity increases. This supports the general implication of the model and is shown to exist for both positive and negative reciprocity and to remain when a series of ability proxies and detailed industry indicators are included.
The role of the board of trustees of nonprofits (NPs) is to legitimize the nonprofit by signaling to consumers that the nonprofit can be trusted and is able to supply the services it offers. Therefore, nonprofits invite people with appropriate attributes such as reputation and wealth to endorse the organization by lending their names to it. Such people provide their reputations to NPs as collateral. It is the exposure of trustees to the potential loss of this collateral that enhances consumer and donor trust in NPs. This article expands these ideas and yields several results on the attributes of desirable and willing trustees.
Models of giving have often been based on altruism. Examples include charity and intergenerational transfers. The literatures on both subjects have centered around neutrality hypotheses: charity is subject to complete crowding out, while intergenerational transfers are subject to Ricardian equivalence. This paper formally develops a model of giving in which altruism is not "pure." In particular, people are assumed to get a "warm glow" from giving. Contrary to the previous literature, this model generates identifiable comparative statics results that show that crowding out of charity is incomplete and that government debt will have Keynesian effects. Copyright 1989 by University of Chicago Press.
Our theory of costly contracts emphasizes that contractual rights can be of two types: specific rights and residual rights. When it is costly to list all specific rights over assets in the contract, it may be optimal to let one party purchase all residual rights. Ownership is the purchase of these residual rights. When residual rights are purchased by one party, they are lost by a second party, and this inevitably creates distortions. Firm 1 purchases firm 2 when firm 1's control increases the productivity of its management more than the loss of control decreases the productivity of firm 2's management.
Private providers of public goods, such as charities, invariably enlist fund-raisers to organize and collect contributions. Common in charitable fund-raising is seed money, either from a government grant or from a group of "leadership givers," that launches the fund drive and generates additional gifts. This paper provides a theoretical basis for fund-raisers and seeds to charity. The primary assumption is that there is a range of increasing returns at low levels of provision of the public good. It is shown that fund-raisers have a natural and important role, and that sometimes only a small amount of seed money can grow into a substantial charity.
This paper shows in two ways that the degree to which free-riding diminishes the performance of deterministic partnerships
may be less than has been generally thought. First, a necessary and sufficient condition is provided for a partnership to
sustain full efficiency. It implies that many non-trivial partnerships sustain efficiency, such as generic ones with finite
action spaces, and neoclassical ones with Leontief technologies. Second, approximate efficiency is shown to be achievable in a large class of partnerships, including ones with smooth and monotonic production
and disutility functions. Approximate efficiency is achieved by mixed-strategy equilibria: one partner takes, with small probability,
an inefficient action. The degree to which efficiency is approximated is restricted only by the amount of liability the partners
can bear. Nonetheless, their equilibrium payments are not arbitrarily large.
When people make donations to privately provided public goods, such as charity, there may be many factors influencing their decision other than altruism. Social pressure, guilt, sympathy, or simply a desire for a "warm glow" may all be important. This paper considers such impure altruism formally and develops a wide set of implications. In particular, this paper discusses the invariance proposition of public goods, solves for the sufficient conditions for neutrality to hold, examines the optimal tax treatment of charitable giving, and calibrates the model based on econometric studies in order to consider policy experiments. Impure altruism is shown to be more consistent with observed patterns of giving than the conventional pure altruism approach, and to have policy implications that may differ widely from those of the conventional models. Copyright 1990 by Royal Economic Society.
In this note we present an example of a repeated partnership game with imperfect monitoring in which all supergame equilibria
with positive discount rates are bounded away from full efficiency uniformly in the discount rate, provided the latter is
strictly positive. On the other hand, if the players do not discount the future, then every efficient one-period payoff vector
that dominates the one-period equilibrium payoff vector can be attained by an equilibrium of the repeated game. Thus the correspondence
that maps the players' discount rate into the corresponding set of repeated-game equilibrium payoff vectors is discontinuous
at the point at which the discount rate is zero.
This paper analyzes the survival of organizations in which decision agents do not bear a major share of the wealth effects of their decisions. This is what the literature on large corporations calls separation of 'ownership' and 'control.' Such separation of decision and risk bearing functions is also common to organizations like large professional partnerships, financial mutuals and nonprofits. We contend that separation of decision and risk bearing functions survives in these organizations in part because of the benefits of specialization of management and risk bearing but also because of an effective common approach to controlling the implied agency problems. In particular, the contract structures of all these organizations separate the ratification and monitoring of decisions from the initiation and implementation of the decisions.
Charities publicize the amounts donors give to them, generally according to dollar categories rather than the exact amount. Donors in turn tend to give the minimum amount necessary to get into a category. These facts suggest that donors have a taste for having their donations made public. This paper models the effects of such a taste for "prestige", in combination with a purely internal taste for giving, or "warm glow", on the behavior of donors and charities. I show how charities can increase donations by using categories. The paper also shows conditions under which tithing, or reporting donations as percentages of income, can maximize donations. Last, the effect of a taste for prestige on competition between charities for donations is examined.
Are nonprofit organizations 'different' from firms with owners? The accepted economic account holds that nonprofits are more trustworthy than business firms because nonprofits cannot distribute profits to owners. However, all firms, nonprofit or proprietary, have converged into similar patterns of behavior. Firms, whether nonprofit or proprietary (or even public), are subject to many of the same economic forces, such as resource dependency, institutional isomorphism, and organizational slack. Even in the absence of shareholders somebody still has to run the enterprise: to decide what objectives to pursue, and how; to manage its financial and human resources; and to span the boundaries of the organization in interacting with the key constituencies, other organizations, and the public. While nonprofits have shareholders privileged with rights of accountability, in most of the business sector shareholders have long lost effective control to firm management. In short, management in both sectors has decisional authority, whether de facto, as in the proprietary sector, or de jure, as in the nonprofit sector. Moreover, the 'nondistribution constraint' cannot guarantee that the nonprofit operates better or worse than a proprietary enterprise in overcoming information asymmetries. The absence of shareholders demanding profits enables the organization to relax into productive inefficiencies, or to cross-subsidize activities the patron would not want to pay for (could she only observe them). Such inefficiencies or cross-subsidization might 'cost' more than the profits the enterprise might otherwise distribute to shareholders if it operated in a proprietary form. Separately, in an industry with more than one nonprofit, the nondistribution constraint cannot help patrons choose between competing nonprofits. It might be difficult to find enough differences on other grounds to justify continued subsidies based on organizational form. Subsidies might need to be targeted to desired services, provided either in the nonprofit or for-profit sector.
Which member of a heterogeneous population will volunteer to provide the entrepreneurial services needed to found a nonprofit firm to privately provide a public good? We develop a model of this decision. The model predicts that nonprofit entrepreneurs will be those who incur relatively low private costs, or get a relatively high private payoff. Less obviously, they will tend to have a high discount rate and relatively long time horizons, either due to their youth, or due to their consideration of generations to come far into the future. If the public good is one which individuals tend to contribute large amounts to, such entrepreneurs will tend to be relatively wealthy. If private contributions to the firm are relatively small, the entrepreneur is more likely to come from the center of the wealth distribution.
We provide the necessary and sufficient condition for a partnership to be able to sustain efficiency when the output is stochastic. When limited liability is imposed, we show that only the level of the average liability of the partnership is important; the individual levels of liability are irrelevant. However, the allocation of the total liability among the partners is crucial when additional conditions such as neutrality or individual rationality are imposed.
This inductive study offers an examination of 23 cases in which informants from firms engaged in large-scale global projects reported unforeseen costs after failing to comprehend cognitive-cultural, normative, and/or regulative institutions in an unfamiliar host societal context. The study builds on the conceptual framework of institutional theory. The findings, which include propositions and a generic narrative model, contribute to theoretical knowledge of how institutional exceptions arise, how they are resolved, and how they typically involve three general phases: ignorance, sensemaking, and response. The findings also articulate the kinds of institutional transaction costs that an entrant incurs in each of the three phases, and the conditions that lead to the growth of these costs. Journal of International Business Studies (2008) 39, 562–588. doi:10.1057/palgrave.jibs.8400370
This paper argues that overlapping games can provide a natural theory of long-lived organizations. It shows that participation
in organizations of infinite duration changes the incentives of agents with finite lives, and will induce more cooperation
than a static model would predict. After developing the general theory, we apply it to the description of career paths in
organizations and show that it can be optimal to give the youngest workers the most arduous tasks.
It has recently been suggested in the agency literature that moral hazard in teams can be dealt with by introducing a third party who breaks the budget-balancing constraint, and that this facilitates the design of contracts that can sustain the Pareto optimum as a (perfect) Nash equilibrium. This note offers an explanation for why the use of budget-breaking schemes is not so widespread as that of active monitoring, despite the fact that such schemes would save the resources expended on supervision. The note demonstrates that allowing the budget to be broken introduces the potential for moral hazard on the part of the third party, which could render the proposed equilibrium incredible.
This article demonstrates that the partitioning of economic activity into for-profit and nonprofit organizations can be at least partially described as the solution to an optimal contracting problem. We show that nonprofit firms may be superior to for-profit firms if the output cannot be costlessly observed.
This article studies moral hazard with many agents. The focus is on two features that are novel in a multiagent setting: free riding and competition. The free-rider problem implies a new role for the principal: administering incentive schemes that do not balance the budget. This new role is essential for controlling incentives and suggests that firms in which ownership and labor are partly separated will have an advantage over partnerships in which output is distributed among agents. A new characterization of informative (hence valuable) monitoring is derived and applied to analyze the value of relative performance evaluation. It is shown that competition among agents (due to relative evaluations) has merit solely as a device to extract information optimally. Competition per se is worthless. The role of aggregate measures in relative performance evaluation is also explored, and the implications for investment rules are discussed.
Industries in which private nonprofit production is present and significant, such as health care and education, account for more than one-fifth of US economic activity. This paper argues that previous analysis of nonprofits has not separated profit-deviating preferences from the state-defined regulatory status of nonprofit production. We argue that this separation is crucial in providing predictions about the underlying forces which allow the coexistence of nonprofit and for-profit production in an industry, as well as predictions about such fundamental matters as the share of nonprofit activity. By separating choice of nonprofit status from profit-deviating preferences, the paper provides predictions about the forces which determine the share of nonprofit production in an industry. We argue that this share falls with the share of the demand that is publicly subsidized, rises with the total number of firms in the industry, and rises with growth in the pace or extent of cost-reductions resulting from learning-by-doing. These predictions stem from a basic aspect of regulatory nonprofit choice which links the degree of competition in a market with the share of nonprofits: the availability of economic profits under for-profit status raises the cost of choosing nonprofit status when such a status is associated with a distribution constraint. Empirical evidence using panel data on US states in the long-term care industry from 1989 to 1994 suggests the presence of the discussed predictions in this industry.
We analyze 114 NYSE- or AMEX-listed corporations with majority shareholders. Majority shareholders are approximately equally divided between corporations and individuals and are typically both directors and officers. When majority blocks trade, stock prices increase and there is substantial management turnover. Although majority shareholders are typically paid larger salaries than officers in diffusely held firms, the difference is small and of marginal significance. Investment policies, the frequency of corporate-control transactions, accounting return, and Tobin's Q are similar for majority-owned and diffusely held firms. Differences in these dimensions do emerge, however, between firms with corporate and individual majority shareholders.
We review different (generic) conditions on stochastic outcome functions to enforce either efficient or nearly efficient partnerships. Their logical relationship is explored. Two kinds of conditions are considered. However, the property for an action profile to be “compatible” plays a crucial role in both kinds. Also, two kinds of enforcement mechanisms are considered: enforcement through utility transfers and enforcement through repetition.Journal of Economic LiteratureClassification Numbers: D2, D7.
In this paper, the authors evaluate certain challenges put forth by Mukesh Eswaran and Ashok Kotwal (1984) and Eric Rasmusen (1987) concerning the legitimacy of Bengt Holmstrom's (1982) proposed solution for the problem of moral hazard in teams. They demonstrate that the argument put forth by Rasmusen hinges on some rather extreme conditions concerning the verifiability of individual actions relating to renegotiation attempts; relaxing these conditions renders efficient budget-balancing contracts infeasible, as argued by Holmstrom. Second, the authors demonstrate that the criticism put forth by Eswaran and Kotwal is invalid, at least if one insists that clandestine deals must satisfy the same incentive-compatibility conditions required of the principal-agent contract proposed by Holmstrom.
Team incentives with stochastic output Soliciting the warm glow: an economic model of fund-raising The informational value of sequential fundraising, " typescript, Iowa State University. WEISBROD, B. ~1983! Nonprofit and proprietary sector behavior: wage differen-tials among lawyers
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