Bad NGOs? Competition in the market for donations and workers' misconduct

Abstract

In this paper, we investigate how competition among NGOs to attract donations affects the behavior of NGOs' employees. NGOs hire workers to undertake development projects, which are horizontally and vertically differentiated. Workers can engage in constructive activities, which enhance project quality, but also in non-observable destructive activities, that damage their employer. NGOs provide their workers with monetary incentives in order to induce them to exert the desired level of constructive effort, but NGOs also need to monitor their employees to curb destructive behavior. When workers' activities are complementary, we obtain the following results: (i) monitoring can fully deter workers' destructive behavior, provided that NGOs do not particularly care about the quality of their projects; (ii) an increase in the degree of competition in the market for development aid raises project quality, but also leads to higher destructive effort, thereby exposing NGOs to scandals; (iii) intense competition has detrimental effects because it leads to insufficient monitoring and excessive destructive behavior relative to the social optimum.