We re-examine the labor donation theory of not-for-profits and show that these organizations may exist not necessarily because motivated workers prefer to work in them, or that they dominate for-profits in terms of welfare, but because the excess supply of motivated workers makes the non-profit form more attractive to managers. We show that if firms had to compete for motivated workers then not-for-profit firms would be competed out by for-profit firms. Therefore, in the choice between not-for-profit and for-profit provision, other than incentive problems, the distribution of rents between management and workers, and consequently, the relative scarcity of motivated workers may play an important role.
Pre-print version of the article is available here. The published version of the article is available here.
Keywords: not-for-profits, intrinsic motivation, labor donation, free-riding.