Employee Care and the Role of Nonprofit Organizations

Employees may care about the effect of their labor effort on output. When such care exists, this paper shows that nonprofit organizations (NPOs) are able to motivate their workers at lower cost than a standard profit-maximizing firm. Unlike previous explanations for NPOs, which depend on the noncontractibility of output, this explanation is consistent with the sectoral pattern of NPO activity. It also generates predictions about when NPOs are likely to be more efficient and predicts differences in employment patterns between for-profit firms and NPOs that are consistent with observations.