Team Incentives and Organizational Form

Al Slivinski
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Al Slivinski: The University of Western Ontario, https://economics.uwo.ca/
Authors registered in the RePEc Author Service: Peter Alfred Streufert

No 9915, University of Western Ontario, Departmental Research Report Series from University of Western Ontario, Department of Economics

Abstract: Conventional wisdom regarding nonprofit firms is that they are inefficient, due to the absence of a profit motive. However, the costs and product quality realized by profit-taking firms is determined by how well those firms deal with a host of internal incentive and information issues. A similar approach to the study of nonprofit organizations has not been attempted. This paper undertakes such an investigation, centered on the problem of providing incentives for members of a team to provide efficient effort. Holmstrom(1982) showed that the introduction of a budget-breaker, or principal, into a team allowed for the provision of such incentives where it would otherwise be impossible. A similar result obtains for a nonprofit team, but the role of principal differs from that found in profit-taking teams. It is shown that any of; donors, government regulators, or Trustees can fulfill this role in a nonprofit team. One implication of this is that nonprofit firms may indeed pay employees less than otherwise identical employees filling identical posts in profit-taking firms.

Date: 1999
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