Mandatory disclosure of managerial contracts in NGOs

Abstract

Nongovernmental Organizations (NGOs) have been recently mandated to disclose the details of their executives’ compensation packages. Contract information is now accessible not only to current and prospective donors, but also to rival NGOs competing for donations in the fundraising market. We analytically study the impact of publicly available contract information on fundraising competition of NGOs. Although such a provision makes contract information available to multiple stakeholders and increases the transparency of the NGO sector, we argue that it also induces NGOs to use properly designed managerial incentive contracts strategically to influence rival NGOs. In particular, we find that the observability of incentive contracts reduces existing fundraising competition. This can be beneficial in terms of NGOs’ outputs and social welfare, in particular when these organizations are trapped in a situation of excessive fundraising activities. However, we show that when donors’ willingness-to-give for projects are sufficiently different, publicly available contract information can distort the NGOs’ choice of projects, leading to socially inefficient project clustering.