Optimal dynamic management of a charity under imperfect altruism

Nonprofit organizations play an important role in providing goods and services in all countries. The objective of this paper is to determine optimal policies for a charity when its managers are imperfectly altruistic. The starting point of our analysis is that the donations a charity receives are a function of its reputation, which is an asset that can be built up over time, not overnight. To account for this important aspect, we propose a dynamic model where the charity can allocate its revenues to three main activities, namely, the program expenditures (charitable projects), information (promotion of its causes, website, etc.) and unproductive consumption benefiting its managers. We compute optimal policies and discuss their implications. We notably find conditions under which imperfectly altruistic managers nevertheless behave ethically. In addition, we show that where they behave non-ethically, advertising and unproductive consumption always move in opposite directions.