Donors’ Responses to Profit Incentives in the Social Sector: The Entrepreneurial Orientation Reward and the Profit Penalty

This study uses an online survey experiment to test whether the pairing of profit‐seeking with mission‐related programs in the social sector attracts or deters donations from individual donors. We test individuals’ response to three types of profit incentives allowed under current U.S. public policy: (1) non‐distributed profit to an organization, which is allowed for nonprofit entities; (2) profit to the organization's equity investors and owners, which is allowed under for‐profit social enterprise governance charters; and (3) profit to lending investors, which is introduced by social impact bonds, a pay‐for‐success policy tool. We test trust theory, under which profit incentives deter donors against entrepreneurial orientation (EO) theory, which suggests that donors are attracted to organizations that use innovative, market‐driven programs. Findings indicate support for both theories, but the support depends on how the specific profit incentive is structured. Donors support organizations that use profit‐generating social enterprise programs—but only when the profits are non‐distributable; donors’ support is significantly lower for social enterprises in which owners and equity investors may profit. Importantly however, this negative effect is not found for pay‐for‐success policy tools where lending investors, rather than equity investors and owners, receive profits.