Bad NGOs? Competition in the Market for Donations and Workers' Misconduct

In this paper, we investigate how competition among NGOs to attract donations shapes the incentives that NGOs provide to their employees. NGOs hire workers to undertake development projects, which are horizontally and vertically differentiated. Workers perform constructive activities that enhance project quality, but can also engage in non-observable destructive activities that harm the employing organization. NGOs offer monetary incentives to encourage constructive effort, but also need monitoring to curb destructive behavior. Our analysis yields the following results: (i) a high mission orientation on the part of NGOs makes workers' misconduct harder to eliminate; (ii) increased competition in the market for donations leads to higher constructive effort and project quality, but also to greater destructive effort; (iii) relative to the social optimum, the market outcome entails inadequate monitoring and excessive destructive behavior.