Believing in Making a Difference

Abstract: Nonprofit firms active in the production of public goods – mission-driven organizations – face higher labor turnover than firms producing private goods for a profit. Simultaneously, they pay lower wages and often use low-powered incentive schemes, which has been explained by binding financial constraints and the threat to attract wrong worker types if wages are increased. We construct a model that reproduces these stylized facts, explains the high labor turnover of mission-driven organizations, and suggests a way out of the nonprofit’s dilemma. Firms that attract intrinsically-motivated workers by exaggerative advertisements about their true social impact create disappointment once the workers learn the truth on the job. Some of these workers leave the firm, some even leave the nonprofit sector, but others costly manipulate their own recollection of the facts and keep believing in making a difference. We construct testable empirical hypotheses and offer managerial and policy implications.