Effort and Monetary Incentives in Nonprofit and For-Profit Organizations

The goal of our paper is to analyze the differences in terms of effort sensitivity to monetary incentive schemes between nonprofit and for-profit salaried workers. Nonprofit organizations being more likely to be devoted to social missions, nonprofit workers would be more pro-socially motivated in their job that their for-profit counterparts. Therefore, monetary incentives like performance pay would be less effective in inducing effort in the nonprofit sector as nonprofit workers are ready to donate labour to their employers. Using workers' stated sensitivity of effort to current and hypothetical use of monetary incentives, we find a significantly higher sensitivity of effort in the for-profit sector using linear and ordered probit estimation. To account for the voluntary selection in sector, we apply an instrumental variable estimation technique and the findings confirm the existence of a positive correlation between unobserved variables explaining sector choice and the unobserved variables determining the sensitivity of effort to actual or hypothetical monetary incentives. Finally, using another econometric methodology based on the idea of omitted variable bias, we are able to conclude that the relative ineffectiveness of monetary incentives in the nonprofit sector is more likely to be due to the intrinsic motivation of nonprofit workers than to any other workers' personality trait like pessimism or optimism that could differ between the two sectors.