Control and Efficiency in the Nonprofit Sector: Evidence from a Randomized Policy Experiment

Results in behavioral economics suggest that material incentives can crowd out motivation, 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 human 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 efficiency. 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.