Toward an Incentive Alignment Theory of Nonprofit Organization

By analogy with some of the economic theories of the for-profit firm, this paper rationalizes the governance features of nonprofit organization, such as the nondistribution constraint and the self-governing character, as instruments for aligning the incentives of nonprofit firms’ stakeholders. Whereas incentive alignment in for-profit firms is aimed at minimizing opportunism, its aim in nonprofit firms is shown to consist of preventing the crowding out of intrinsic motivation. The nondistribution constraint and the self-governing character achieve this aim by switching off, respectively, monetary and administrative incentives. Since switching off administrative incentives means reducing the role of monitoring and sanctioning, nonprofit firms are subject to the risk of excessive shirking if they are entered by individuals lacking relevant intrinsic motivation. To protect themselves from being so exploited, nonprofit firms need to use screening devices, of which the payment of relatively low wages is one example.