Intermediation by aid agencies
AbstractThis paper models aid agencies as financial intermediaries that do not make a financial return to depositors, whose concern is to transfer resources to investor-beneficiaries. This leads to a problem of verifying that the agency is using donations as intended. One solution to this problem is for an agency to employ altruistic workers at below-market wages: altruistic workers, who can monitor the agency's activities, would not work at below-market rates unless it were genuinely transferring resources to beneficiaries. We consider conditions for this solution to be incentive compatible. In a model with pure moral hazard, observability of wages makes incorporation as a not-for-profit firm redundant as a commitment device. In a model with both moral hazard and adverse selection, incorporation as a not-for-profit firm can serve as a costly commitment mechanism reassuring donors against misuse of their funds. Hiring a worker of low ability can also be a valuable commitment device against fraud.
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Bibliographic InfoPaper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 05-16.
Length: 30 pages
Date of creation: Nov 2005
Date of revision:
signalling; non-profit; wage differential; donations; altruism; two-sided market;
Other versions of this item:
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- D64 - Microeconomics - - Welfare Economics - - - Altruism; Philanthropy
- J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
- L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-04-01 (All new papers)
- NEP-LAB-2006-04-01 (Labour Economics)
- NEP-MIC-2006-04-01 (Microeconomics)
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