The Nonprofit's Dilemma

Abstract

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.<br>