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The Nonprofit’s Dilemma

Nonprofit firms producing services that are of broad public concern — mission-driven organizations — are a key part of the economy in many countries, especially in “care” sectors (healthcare, childcare, care for the elderly…). They mostly pay lower wages than for-profit firms and often use low-powered incentive schemes, which has been explained by binding financial constraints and the threat to attract wrong worker types if wages are increased. Yet, they face higher labor turnover than for-profit firms, which is very costly.

Together with Yilong Xu, in a new, short discussion paper, I construct a simple model that reproduces these stylized facts, explains the high labor turnover of mission-driven organizations, and suggests a way out of this nonprofit’s dilemma, based on insights from the economic psychology literature. We construct testable empirical hypotheses and offer managerial and policy implications.