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Team Incentives and Organizational Form

  • Slivinski, Al

Conventional wisdom regarding nonprofit firms is that the absence of a profit motive renders them inefficient. However, the costs and product quality realized by profit-taking firms is determined by how well those firms deal with a variety of internal incentive and information problems, and this should be equally true for nonprofits. This article analyzes the team incentive problem in nonprofit organizations. Holmstrom (1982) showed that the introduction of a budget-breaker into a team permitted the creation of incentives to provide efficient effort when it is otherwise 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 shown to be that nonprofit firms may indeed pay employees less than otherwise identical employees earn in identical jobs in profit-taking firms. Copyright 2002 by Blackwell Publishing Inc.

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Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 4 (2002)
Issue (Month): 2 ()
Pages: 185-206

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Handle: RePEc:bla:jpbect:v:4:y:2002:i:2:p:185-206
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  1. Bilodeau, M. & Slivinski, A., 1997. "Retional Nonprofit Entrepreneurship," UWO Department of Economics Working Papers 9709, University of Western Ontario, Department of Economics.
  2. Susan Rose-Ackerman, 1996. "Altruism, Nonprofits, and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 701-728, June.
  3. Andreoni, James, 1989. "Giving with Impure Altruism: Applications to Charity and Ricardian Equivalence," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1447-58, December.
  4. Patrick Legros & Hitoshi Matsushima, 1991. "Efficiency in partnerships," ULB Institutional Repository 2013/7044, ULB -- Universite Libre de Bruxelles.
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  8. David Andolfatto & Ed Nosal, 1997. "Optimal Team Contracts," Canadian Journal of Economics, Canadian Economics Association, vol. 30(2), pages 385-96, May.
  9. Patrick Legros & Steven A. Matthews, 1992. "Efficient and Nearly Efficient Partnerships," Discussion Papers 991R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  10. Weisbrod, Burton A, 1983. "Nonprofit and Proprietary Sector Behavior: Wage Differentials among Lawyers," Journal of Labor Economics, University of Chicago Press, vol. 1(3), pages 246-63, July.
  11. Andreoni, James, 1990. "Impure Altruism and Donations to Public Goods: A Theory of Warm-Glow Giving?," Economic Journal, Royal Economic Society, vol. 100(401), pages 464-77, June.
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  13. Cremer, Jacques, 1986. "Cooperation in Ongoing Organizations," The Quarterly Journal of Economics, MIT Press, vol. 101(1), pages 33-49, February.
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