Impact Investment and Non-financial Incentives

We consider a framework in which both a principal and an agent care about a social mission, such as addressing social or environmental concerns. The agent requires financing and must satisfy a budget constraint. Under incomplete information, in addition to the usual quantity distortions for inefficient agents, the principal also distorts the mission upward for efficient agents and downward for inefficient ones. In our context, the existence of hidden types may improve total welfare compared to complete information, as screening incentivizes the principal to propose a contract with a higher mission to reduce the rent of more efficient types. Our results apply to social enterprises and triple bottom line environments, contributing to the theoretical understanding of the impact of non-financial incentives on optimal contracting.