Scandinavian Working Papers in Economics

Working Paper Series, Center for Labor Studies,
Uppsala University, Department of Economics

No 2011:6: Control and Efficiency in the Nonprofit Sector: Evidence from a Randomized Policy Experiment

Niklas Bengtsson () and Per Engström ()
Additional contact information
Niklas Bengtsson: Uppsala Center for Labor Studies, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden
Per Engström: Uppsala Center for Labor Studies, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

Abstract: Results in behavioral economics suggest that material incentives can crowd out effort, if agents are mission-oriented rather than self-interested. We test this prediction on a sample of nonprofit organizations in Sweden. Swedish nonprofit organizations receive tax funds annually to promote global development issues through information campaigns. Traditionally, the contract with the main principal (the Swedish foreign aid agency) has been based on trust and self-regulation. We designed an experimental policy intervention, effectively replacing the trust-based contract with an increased level of monitoring from the principal, along with a threat to cut future funds if irregularities were detected. Our findings are inconsistent with (strong) motivational crowd-out. Overall, using both self-reported and observed measures of outreach, we find that the intervention improved effciency. Graphical analysis shows that non-monitored organizations exhibit a distinct tendency to maximize expenditure; in contrast, organizations in the treatment group are more likely to return unused grants to Sida. Additionally, we find no crowding out of private contributions and no evidence of a \discouraged NGO"-syndrome.

Keywords: Bureaucrats; NGO; Economics of psychology; Foreign aid; Randomized experiments; Hawthorne effect; Laboratory vs. field evidence; Treatment externalities; Spillover effects; Reference group contamination

JEL-codes: D03; H83; L31; O19

27 pages, April 18, 2011

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