halshs , version 1-30 Aug 2013 Effort and Monetary Incentives in Nonprofit and For-Profit Organizations

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1 WORKING PAPER N Effort and Monetary Incentves n Nonproft and For-Proft Organzatons JOSEPH LANFRANCHI, MATHIEU NARCY TEPP - Insttute for Labor Studes and Publc Polces TEPP - Traval, Emplo et Poltques Publques - FR CNRS 3435

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3 Effort and Monetary Incentves n Nonproft and For-Proft Organzatons Joseph Lanfranch*, Matheu Narcy** 1 January 2012 Do not quote wthout permsson Abstract The goal of our paper s to analyze the dfferences n terms of effort senstvty to monetary ncentve schemes between nonproft and for-proft salared workers. Nonproft organzatons beng more lkely to be devoted to socal mssons, nonproft workers would be more pro-socally motvated n ther job that ther for-proft counterparts. Therefore, monetary ncentves lke performance pay would be less effectve n nducng effort n the nonproft sector as nonproft workers are ready to donate labour to ther employers. Usng workers stated senstvty of effort to current and hypothetcal use of monetary ncentves, we fnd a sgnfcantly hgher senstvty of effort n the for-proft sector usng lnear and ordered probt estmaton. To account for the voluntary selecton n sector, we apply an nstrumental varable estmaton technque and the fndngs confrm the exstence of a postve correlaton between unobserved varables explanng sector choce and the unobserved varables determnng the senstvty of effort to actual or hypothetcal monetary ncentves. Fnally, usng another econometrc methodology based on the dea of omtted varable bas, we are able to conclude that the relatve neffectveness of monetary ncentves n the nonproft sector s more lkely to be due to the ntrnsc motvaton of nonproft workers than to any other workers personalty trat lke pessmsm or optmsm that could dffer between the two sectors. Keywords: pro-socal motvaton, effort, ncentves, nonproft organzatons JEL Code: J33, M12, M52, L31 1 * Correspondng author: Assocate Professor, Centre d Etudes de l Emplo and LEM, Unversté Panthéon- Assas. Address : CEE, 29 Promenade Mchel Smon, Nosy-Le-Grand. E-mal: joseph.lanfranch@ceerecherche.fr. ** Assocate Professor, ERUDITE, Unversté Pars-Est Crétel, CEE and TEPP (FR 3126, CNRS). CEE, 29 Promenade Mchel Smon, Nosy-Le-Grand, France. E-mal : matheu.narcy@cee-recherche.fr. We wsh to thank Thbaut Brodaty, Patrca Crfo and all the partcpants to the CEE and ERUDITE, Unversty of Pars-Est, semnars for helpful comments. 1

4 1. Introducton In the tradtonal economcs paradgm, ndvdual utlty s alleged to decrease wth the extent of effort at work and therefore effort may be obtaned from workers by means of monetary compensaton. However, the growng nfluence of psychologcal theores of ndvdual motvaton has engendered a new realm of theoretcal and emprcal research n whch the motvators of employees are far more dverse and complex than the smple monetary component. Among these, ntrnsc satsfacton derved from workng n partcular types of frms and jobs or more specfcally from carryng out some specfc tasks would be one powerful source of employees motvaton. Accordng to WEISBROD (1988), the orgn of nonproft organzatons can be traced n the need for complementng the supply of collectve goods and servces by the state. Choosng to work voluntarly n these organzatons, customarly devoted to the producton of general nterest servces n sectors lke educaton, health and care, would reveal what FRANÇOIS and VLASSOPOULOS (2008) names pro-socal motvaton at work. Ths s a type of ntrnsc motvaton, that s a motvaton that does not depend on extrnsc rewards but on the partcpaton to an actvty valuable per se. Therefore, nonproft organzatons beng more lkely to be devoted to socal mssons, nonproft workers would be more ntrnscally motvated n ther job that ther for-proft counterparts. Dfferences n the extent of pro-socal preferences of workers would be lkely to nfluence both the nature and the desgn of the ncentve schemes usually devoted to the management of employees effort. Indeed, when employees already experence hgh levels of utlty from the ntrnsc contents and goals of ther jobs, ther employer may expect to obtan the requred level of work effort whle fuellng ther motvaton through job desgn and/or usng low-powered monetary ncentves. The goal of our paper s to emprcally nvestgate the degree of effectveness of monetary ncentve schemes when workers are lkely to experence pro-socal motvaton from ther employment relatonshp. More precsely, we wll analyze the dfferences between nonproft and for-proft salared workers n terms of effort senstvty to monetary ncentve schemes. Ths study belongs to a growng feld of research concernng the dfferences n work motvaton n for-proft and nonproft sectors. Under ths assumpton, at least two predctons can be made about the human resources strateges of nonproft frms and the behavour of ther employees. Frst, labour donaton theory postulates that the producton of socal benefts wll act as a reward for pro-socally motvated employees who would therefore be ready to accept lower wages and/or to offer hgher effort at work (PRESTON, 1989) 2. For 2 A large body of conflctng evdence has been obtaned n varous countres about the extent of the wage dfferentals between nonproft and for-proft sectors (see RUHM and BORKOSKI, 2003 for a summary of emprcal fndngs). However, to our knowledge, drect comparson of effort levels n the two sectors has been specfcally studed n two papers only: GREGG et al.(2008) present evdence of hgher level of uncompensated overtme hours n the Brtsh nonproft and publc sectors whle LANFRANCHI and NARCY (2010b) show that 2

5 ths reason, hgh-powered monetary ncentves desgned to mprove employees performance would be less necessary n the nonproft sector. The theoretcal model proposed by BESLEY and GHATAK (2005) demonstrates that for the same contractual level of senstvty of performance pay to observed performance, workers wth hgher pro-socal motvaton wll supply hgher effort. Then, as performance pay s costly for the employer, he wll decrease ts amount at the optmum. Second, ntrnsc and extrnsc motvators are not necessarly perfect substtutes to each other. As pro-socal motvaton s largely bult on self-determnaton of employees, psychologcal theory has put forward that t s lkely to be crowded out by the use of extrnsc ncentves lke performance pay or close montorng (DECI and RYAN, 1985). Therefore, we should emprcally observe that nonproft employees effort s less lkely to be senstve to the use of performance based ncentves. The database used n ths paper enabled us to nvestgate ths predcton drectly. The emprcal analyss s based on a survey desgned n the EPICURUS European project to nvestgate the lnk between work patterns and job satsfacton. Ths dataset s well suted for the purposes of our research as t contans stated behavour reported by the workers about the lnk between ncentve schemes and effort. Frst, respondents are asked to report on a dscrete scale the senstvty of ther actual effort to the use of monetary ncentve schemes. Second, they also report what the senstvty of ther effort would be f supplementary monetary ncentve scheme was mplemented by ther employers. Consequently, we are able to compare the relatve effectveness of real and hypothetcal monetary ncentve schemes accordng to the nature of the employer. The paper s organzed as follows. A dscusson of the theoretcal and emprcal ratonale for the relatve effectveness of monetary ncentve schemes n for-proft and nonproft sectors s presented n secton 2. Secton 3 s devoted to the descrpton of the dataset whle secton 4 presents our detaled econometrc strategy. Fnally, secton 5 reports our emprcal results usng OLS, ordered probt and nstrumental varable estmators of the dfference of employee s senstvty to ncentves between nonproft and for-proft sectors. Secton 6 dscusses the relablty of these results whle secton 7 concludes. 2. Monetary ncentves systems and work motvaton The standard economst vew of the management of work motvaton has been tradtonally founded on the assumpton that employees were reluctant to offer a hgh level of effort. Therefore, t s necessary for managers to desgn ncentve schemes when the level of effort s not verfable. The technques that frms may use to manage effort towards the desred level fall nto two broad categores: montorng (of the chosen rhythm of work, of the task realzaton, of workng tmes and French nonproft workers not only accept lower wages than for-proft workers but are also sgnfcantly less absent at work. 3

6 absenteesm) and monetary ncentves, manly based on objectve performance at the ndvdual or collectve level or subjectve evaluaton of employee s mert. These ncentves mechansms le systematcally on elements extrnsc to the job. However, psychologcal studes have consstently demonstrated the power of ntrnsc motvators n the realzaton of workng tasks (DECI and RYAN, 1985). Hence, a new realm of economc studes has questoned how the presence of ntrnsc motvaton may be a substtute to extrnsc motvators or f these two sources of workers nvolvement are compatble. The goal of ths secton s to revew the theoretcal ratonale of the relatve effectveness of monetary ncentves n nonproft and for-proft organzatons and to present the related emprcal evdence Theoretcal ratonale for monetary ncentves n nonproft organzatons. In the case of a hard but non observable work effort, the resultng ncentve problem can be solved by makng the employee s compensaton dependent of a sgnal of hs performance correlated wth the realzed effort. Prncpal-agent lterature has extensvely studed, both theoretcally and emprcally, the work stuatons where the varous monetary ncentve schemes (pece rate, ndvdual or collectve bonus, proft sharng and stock opton) are lkely to be effcent. PRENDERGAST (1999) revewed at length ths lterature; he concludes n favour of the effcency of ncentve schemes but also rases some of the rsks assocated wth these. Here, we emphasze two sorts of rsks assocated wth a careless use of ncentve systems. The frst would be to neglect the nature of the msson of the employer and to mport navely performance bonuses proved to be effcent n a for-proft context. Publc and prvate nonproft organzatons producng collectve goods wth socal benefts are lkely to attract workers ntrnscally motvated to undertake a pro-socal behavour. BESLEY and GHATAK (2005) show that such form of motvaton may act as a full substtute for the use of monetary ncentves or at least reduce ther mportance n total compensaton. Therefore, the effort chosen by the worker drven by pro-socal motvaton wll be hgher than the one chosen by the worker drven by pecunary motvaton whle the performance bonus n hs total compensaton s lower. In ths model, the reduced use of monetary ncentves only reles n the dea that n order to acheve an optmal level of effort, the need of the extrnsc monetary ncentves s reduced by the presence of ntrnsc motves of performance 3. A second rsk would be to crowd out the exstng but fragle ntrnsc motvaton of the employees whle ntroducng extrnsc motvators. FREY (1997) proposed a modelled archtecture to evaluate the 3 Aurol and Brlon (2009) extends the model of Besley and Ghatak ncorporatng a thrd category of agents, the ndvduals who derve pleasure from some form of destructve or ant-socal behavor. In the presence of such potental ncumbents n the nonproft sector, nonproft employers wll stll beneft from superor motvaton of pro-socal workers and have lower recourse to monetary ncentves. However, they wll also need to ncrease ther degree of montorng of effort and/or ther applcant screenng nvestment. 4

7 consequences on the employee s productve behavour of the use of extrnsc and ntrnsc motvators. Bascally, employees chose ther nvestment n effort comparng ts relatve benefts and costs. The mplementaton of any extrnsc motvator drves two effects: a dscplnng effect decreasng the margnal cost of effort or ncreasng ts margnal beneft and a crowdng-out (resp. crowdng-n) effect on ntrnsc motvaton ncreasng (resp. decreasng) the margnal cost of effort or decreasng (resp. ncreasng) ts margnal beneft. Therefore, accordng to the form of the extrnsc motvator and the sources of the ntrnsc motvaton, the total effect on effort of the use of extrnsc motvator wll vary. It s therefore necessary to expand the basc assumptons about behavoural reactons of employees to varous ncentve systems to fully understand when ther effcency s at ts maxmum. Accordng to the theory of cogntve evaluaton (DECI and RYAN, 1985), the feelng of self-determnaton s central to mantan the ntrnsc motvaton of ndvduals whle external nterventon seekng to control ther behavour would fnally decrease t. Frey therefore concludes that the more the compensaton s based on performance, the more the effort at work s perceved as controlled resultng n a reducton n ntrnsc motvaton. The crowdng-out effect can also be ratonalzed n the context of mperfect nformaton. Frst, f worker and employer have unequal nformaton, the mplementaton of monetary ncentves may lead the former to reassess hs belefs about hs qualty or about the nature of hs job (BÉNABOU and TIROLE, 2003). Interpretng the use of monetary rewards as a sgnal that the task s more dffcult or that hs expected productvty s lower, then hs motvaton wll be weakened and so hs effort. Second, true nformaton s not necessary to trgger a decrease of the agent s ntrnsc motvaton as a sgnal of dstrust may also mply the same consequence. For example, f the salared worker of the nonproft sector hypotheszes that hs employer shares the same values, deology or goals to serve the socety, then the use of ncentves can be perceved as a sgnal of dstrust from the employer. HEROLD (2010) shows that when trust s an mportant dmenson of the employment contract, t may be optmal for the prncpal to leave the contract ncomplete and do not use any ncentves based on performance. Fnally, f nonproft worker obtans good reputaton from partcpatng to actvtes creatng socal benefts, ths reputaton may be spoled by the perceved change n the value of hs nvestment caused by the pecunary award (BÉNABOU and TIROLE, 2006). Consequently, usng performance payments should be less effectve at nducng work effort n nonproft organzatons f workers motvaton to contrbute s partly based on self-mage concerns. Furthermore, the promse to receve a wage superor to the one earned by fellow workers could affect effort n a dfferent way n nonproft and for-proft sectors. FEHR and SCHMIDT (1999) propose a theoretcal model where ndvduals show averson to wage nequty, negatve as postve. Negatve nequty averson refers to a stuaton where ndvduals dslke to beng n a worse stuaton than ther peers. Postve nequty averson s the dslke to beng better off than ther peers. Ths averson rests on a sort of gult feelng f the worker feels hmself as overpad. If partcpaton to the nonproft sector 5

8 s a sgnal of altrustc motves, beneftng from a hgher compensaton than smlar workers could nduce a lower effort donaton from nonproft workers than from for-proft workers Emprcal evdence There s a relatvely small body of emprcal lterature on the effect of monetary ncentves on prosocal motvaton n the labour market. The frst set of evdence deals wth the lmted use of monetary ncentves n nonproft organzatons. Both ROOMKIN and WEISBROD (1999) and BALLOU and WEISBROD (2003) confrm that for-proft hosptals are more lkely to mplement performance pay for ther managers and CEOs than nonproft ones. Also, DEVARO and BROOKSHIRE (2007) found sgnfcant evdence that promotons based on productve performance are less lkely n nonproft than n for-proft frms. There s also some emprcal evdence n support of the dea that workers engaged n pro-socal actvty cut n ther effort when monetary ncentves are mplemented. FREY and GÖTTE (1999) show evdence of such crowdng effect for volunteers who chose to cut n ther workng hours when rewarded. CARPENTER and KNOWLES MYERS (2010) fnd that volunteer frefghters are drven by altrustc and socal reputaton concerns but that the effect of small monetary ncentves lessen wth such mage motvaton. Publc servce motvaton s another form of pro-socal motvaton for publc sector workers. In a detaled study of the motvators of work n the Brtsh publc sector, GEORGELLIS et al. (2010) have found that publc sector workers self select themselves on the bass of the attracton of ntrnsc motvators. Furthermore, but only n the hgher educaton sector and Natonal Health Servce, mplementaton of extrnsc monetary rewards deters the applcants to accept publc sector employment. Fnally, DECKOP and CIRKA (2000) provde a drect test of the crowdng out of prosocal motvaton n the nonproft sector. They fnd evdence that the ntroducton of a mert pay system n a prvate nonproft college lead to a sgnfcant decrease n ntrnsc motvaton for employees ntally hghly ntrnscally motvated. Some supplementary evdence can also be obtaned from expermental studes. Usng the stated preferences of nonproft and for-proft workers towards attrbutes of hypothetcal job offers n the context of a dscrete choce experment, LANFRANCHI and NARCY (2010a) fnd evdence that, contrarly to for-proft workers, non-proft workers do not value explct contractual arrangements where hgh effort s exchanged aganst job securty. They conjecture that the lkely convergence of nterests between ntrnscally motvated workers and ther employer mples that the former do not experence supplementary utlty from an explct demonstraton of loyalty from the latter. On the contrary, the explct loyalty offer crowds out the ntrnsc motvaton of nonproft workers because t acts as an extrnsc control that changes the percepton of the contract. In the lab, a recent experment by FEHRLER and KLOSFELD (2010) dsplay evdence that the results of Besley and Ghatak summarzed 6

9 above are not confrmed. In a frst step, the subjects were supposed to pck up from a lst of 11 non governmental organzatons (NGO) for whch they can generate a donaton proportonal to ther chosen effort. These subjects were employed on the bass of a pece rate contract. In a control group, subjects generated a donaton to a randomly chosen (and unknown) student of the Unversty of Zurch. The results of the experment show that there s no supplementary donated effort n the group of the subjects matched wth a non governmental organzaton. It s however worth to note that the subjects were not able to adopt a perfectly selfsh behavour and refuse to be pared wth a NGO. Therefore, t s possble that these results are also drven by a large proporton of subjects wth a low pro-socal motvaton. Fnally, the nfluence of wage equty on sustanng nonproft workers effort has been supported by two studes. Frst, LEETE (2000) suggests that status and wage dfferentaton that enhance extrnsc motvaton may well be ncompatble wth mantanng ntrnsc motvaton. Emprcally, she found sgnfcant evdence that wthn occupaton wage dsperson s sgnfcantly lower n the nonproft sector. Also, PENNERSTORFER and SCHNEIDER (2010) fnd that nonproft organzatons exhbt smaller nternal wage dsperson partcularly when they employ a sgnfcant share of volunteers. 3. Data and descrptve evdence The statstcal source s a broad survey desgned n the context of the European project EPICURUS to nvestgate the relatonshps between work patterns and well-beng. The questonnare has been carred onlne n sx countres, namely Denmark, Fnland, France, the Netherlands, Span, and Unted Kngdom, and by drect ntervews n Greece n August and September Restrctons both n terms of costs and tme of realzaton of the survey lmted the sze of the sample n each country 4. Gven that the number of observatons had to be lmted, t was also mportant to agree on a homogenous group of ndvduals. Our survey sample ncludes salared workers whose employment s the man actvty (excludng students), employed n all ndustres except agrculture and fshery, between age of 18 to 65, wth a maxmum educatonal level of 4 n the ISCED Internatonal Classfcaton of In order to perform a strct comparson between nonproft and for-proft frms wthn the prvate sect, we have chosen to exclude all cvl servants and employees of publc owned frms to perform or. Second, we have constraned our analyss to servces sector as nonproft organzatons only move n ths part of the economy. Consderng senstvty of work effort n smlar ndustres crcumvents the 4 The number of respondents n each country was respectvely 1,011 n Denmark, 331 n Fnland, 1,008 n France, 800 n Greece, 1,007 n the Netherlands, 304 n Span and 1,002 n the Unted Kngdom. 7

10 rsk of comparsons between dfferent types of jobs and work organzaton n frms. In fne, our sample of study contans employees, 335 n the nonproft sector and n the for-proft one. Ths data base contans both objectve nformaton about the ndvdual respondent, hs household and hs past and current work stuaton and subjectve nformaton lke opnons about varous domans on both job and lfe. Among the latter, two partcularly orgnal questons are nterestng to assess the motvatonal roots of nonproft and for-proft employees. Frst, ndvdual respondent s asked to assess how hs effort s senstve to the actual use of monetary ncentves. Second, he s then asked to assess how he would react n terms of work effort f hs employer was usng hypothetcal monetary ncentves. The senstvty of employees effort to current and hypothetcal monetary ncentves s evaluated on an ordnal scale from 1 (very unmportant) to 5 (very mportant). The stated mpact of the current monetary ncentves on employees effort s hgher for the for-proft employees than for the nonproft ones wth an average ratng of 3.8 compared to 3.3. Ths mpact s also hgher when we consder the mpact of hypothetcal monetary ncentves 3.9 for for-proft employees versus 3.2 for nonproft ones. These two dfferences sgnfcant at 1% level seem consstent wth the vew that nonproft employees are drven by a superor pro-socal motvaton than ther forproft counterparts. However, ths prelmnary evdence s lmted. In fact, the observed dfferences of evaluatons may be the result of sgnfcant dfferences between the nonproft and for-proft jobs. More partcularly, the possble dfferences n the current ncentves practces establshed by nonproft and for-proft employees may broadly explaned the lower senstvty of nonproft workers effort to current and hypothetcal monetary ncentves. Fortunately, the used dataset descrbes n detal the characterstcs of the job (workng condtons, work organzaton, work ntensty ) but also actual ncentve systems lke the degree of lattude and autonomy, the extent of montorng of the workforce, chances of promoton, mert pay, use of monetary bonus. To our knowledge, such detal nformaton n dataset s qute rare. Hence, these extended controls varables authorze a comparson between the nonproft and for-proft sectors as close as possble to the ceters parbus assumpton. Indeed, the dfferences of evaluaton of the effcency of ncentve schemes may be due to the varety of the recourse of varous compensaton polcy and/or work organzaton. The Table 1 below dsplays sgnfcant evdence that for-proft and nonproft workers are not usually subject to the same type of ncentves practces. Ths table reports descrptve statstcs by sector of varous job characterstcs, lkely to affect the level of effort of employees and, therefore, ther evaluaton of the effcency of monetary ncentves. For-proft workers are sgnfcantly more lkely to experence the use of performance pay as they are 23.3% declarng that they could receve extra payments lke bonus or stock optons and 7.9% that they receve mert pay aganst respectvely 5.3% and 3.3% of the employees n the nonproft sector. Nevertheless, nonproft workers are more lkely to perceve an end-of-year bonus. The workers evaluaton of ther probablty of beng promoted s sgnfcantly hgher among for-proft workers than among nonproft ones. Autonomy s 8

11 hgher for the nonproft workers because they are gven more lattude to put ther own deas nto practce at work. Table 1: Current ncentve methods n the nonproft and for-proft sectors Varables Varables Nonproft sector For-proft sector Supplementary Monetary Prema: End-of-year bonus *** Extra payments such as bonuses or stock optons *** Mert pay*** Probablty of beng promoted: Very probable * ;70 Probable *** Improbable *** Very mprobable Doesn t know Control and autonomy : No one controls your work Put your own deas nto practce at your work (nearly always o frequently)*** N Source: European Commsson, Epcurus Survey 2004 Note: Frequences are sgnfcantly dfferent n the two sectors at: *** 1%, ** 5%, * 10%. 4. Econometrc strategy 4.1. Ordered probt model and COLS transformaton In order to estmate the evaluaton by employee of the effcency of ncentve schemes on work effort, we can wrte the followng model: E * = α ' NP + β ' X + ε (1) 9

12 where * E s a contnuous latent varable measurng the effect of actual and hypothetcal ncentve schemes on levels of effort. However, the true value of ths varable s unobservable and we only observe the evaluaton E such that E = f E, reported on a dscrete 1-5 scale. NP measures f * ( ) the employee belongs to the nonproft sector. The vector X ncludes a lot of observable workers and job characterstcs. ε s a normal random term supposed to be dstrbuted as a normal functon wth 2 ε null mean and varancesσ. The sgnfcance of estmated parameter α reveals a dfference of evaluaton of effcency of a gven ncentve scheme between nonproft and for-proft employees, controllng for dentcal characterstcs X. The explaned varable s an ordered varable and the emprcal model (1) would therefore be estmated usng ordered probt model. However, the estmaton method used below s not constent wth the use of ordered varables. Consequently, we have chosen to transform the dscrete reported evaluatons of the effcency of ncentve schemes on work effort E nto values denoted E measured on the real axs. Ths transformaton requres that the transformed values preserve the rankng of the orgnal evaluatons. For ths purpose, we use the Cardnal Ordnary Least Squares method (COLS) ntroduced by van Praag and Ferrer--Carbonell (2004, Chapter 2). Consderng the dscrete scale 1-5, we assume that any dscrete value taken by our observed varable E represents a transformaton of * E orgnally belongng to one of the ntervals [1,1.5], ]1.5,2.5],, ]4.5,5]. If the scale s then lnearly transformed nto the 0-1 scale, we can construct our new varable the followng formula: * * n 1 n 1 n λn E for each one of the fve possble values usng ϕ( λ ) ϕ( λ ) (2) n E = E( E λ < E < λ ) = Φ ( ) Φ ( λ ) n 1 where the λ {0, 0.125, 0.375, 0.625, 0.875, 1} and φ (.) and Φ (.) represent the normal densty and dstrbuton functons respectvely. The new dependant varable E of our model s the condtonal mean of * E. Our econometrc model (1) s then rearranged as follows: E = α ' NP + β ' X + ε (3) and can be estmated usng conventonal lnear methods. Moreover, Ferrer--Carbonel and Frjters (2004) have shown that the estmated coeffcents obtaned wth the COLS method are dentcal to the coeffcents obtaned wth ordered probt model, up to a multplyng postve factor. 10

13 However, workers may self-select nto the nonproft sector accordng to the hgher pro-socal motvaton. Consequently, there s also a potental bas due to a selecton on unobserved characterstcs and the varable NP n the equaton (3) s presumably endogenous. To address the ssue of selecton bas, we consder nstrumental varables approach usng the COLS varables Instrumental varable estmaton To account for the selecton on unobservables, we propose to apply an nstrumental varables procedure descrbed by WOOLDRIDGE (2002). Intally, we estmate the choce of the nonproft sector by regressng NP on the sets of ncluded nstruments X and excluded nstruments Z usng a probt model: P( NP = 1 X, Z ) = δ ' X + δ ' Z + µ (10) 1 2 Then, we predct the probablty to belong to the nonproft sector: ˆ ˆ ' ( ˆ ' Φ = Φ δ X + δ Z ) (11) 1 2 Fnally, the outcome E s estmated by Instrumental Varables usng ths predcted probablty as the sngle excluded nstrument ( Φˆ ) together wth the set of ncluded nstruments ( X ). It s mportant to note that Φˆ s not used as a drect regressor but that the frst step of the IV procedure s the usual lnear projecton of our endogenous regressor NP onto all the exogenous varables: N ˆ ' P = γ + γ X + ν (12) ' Φ ˆ 1 2 Accordng to Wooldrdge, ths method s robust to the msspecfcaton of the frst-stage probt model (10) and the IV estmator s effcent f Var( ε ) = Var( ε X, Z ). 5. Results 5.1. Ordered probt and COLS estmates 11

14 The frst two columns of Table 2 report ordered probt and COLS estmates of the effect of workng n the nonproft sector on the senstvty of effort to current and hypothetcal monetary ncentves. The control varables are presented n Table A1 of the appendx. They nclude workers characterstcs (age, gender, martal status, level of educaton, senorty, the fact that the employee exert a supplementary job) and job characterstcs (monthly wage, occupatonal ndcators, number of contractual weekly workng hours, number of overtme hours, havng a permanent contract, sze of the frm, a dummy measurng the access to tranng durng the year, havng a stressful job, havng a repettve job, degree of work ntensty, workng n the team, qualty of relatons wth the boss and wth the colleagues). The varables presented at the bottom of Tables A1 are the job characterstcs descrbed nto Table 1 and hypotheszed to affect the level of effort of employees. We can observe that ordered probt and COLS estmates gve qualtatvely smlar evdence. The results hghlght the sgnfcantly lower mpact on effort of the current and hypothetcal monetary ncentves for nonproft employees. Spurred on by a more ntrnsc motvaton, they are less sensble to the pecunary rewards. Furthermore, the ntroducton of monetary ncentves would not ncrease ther effort as much as t would for for-proft employees. Ths fndng can be seen as an evdence of a sort of crowdng out effect of ther ntrnsc motvaton Table 2: The effect of workng n the nonproft sector on the senstvty of effort to current and hypothetcal monetary ncentves oprobt COLS IV Current monetary ** ** ncentves (0.082) (0.078) (0.199) Hypothetcal monetary *** *** ncentves (0.083) (0.072) (0.184) Source: European Commsson, Epcurus Survey Note: The control varables are those presented n Table A1 of the appendx. Standard errors are n parenthess. Sgnfcant at ***1%, **5% and *10% levels Results from the IV estmaton Followng the IV procedure proposed by WOOLDRIDGE (2002), we frst estmate the choce of nonproft sector n order to predct the probablty to belong to ths sector. The probt estmaton of the lkelhood to work n the nonproft sector s gven n Table A2 from the appendx. The effect of excluded varable Z s presented at the bottom of Table A2. We propose one sngle nstrumental varable n Z. Ths nstrument measures the worker s reported level of housng satsfacton on a scale 12

15 from 0 to In fact, the advantage of ths varable comes from the fact that t belongs to a doman of lfe that s not drectly related wth the personal experence of the ndvdual at the workplace. Therefore, we are more convnced that the reported level of dwellng satsfacton s unlkely to be correlated drectly wth the senstvty of effort to monetary ncentves. Ths varable s found to nfluence negatvely and sgnfcantly the nonproft sector choce. The thrd column of Table 2 report the IV estmates of the effect of workng n the nonproft sector on the senstvty of effort to current and hypothetcal ncentves schemes. Takng nto account the voluntary selecton of the workers n the nonproft sector does not contradct the message of our orgnal results. Usng the probt ftted probablty to belong to the nonproft sector as an nstrument produces a smaller and especally nonsgnfcant effect of belongng to the nonproft sector on the senstvty of effort to monetary ncentves, ths beng true for both current and hypothetcal use of these. Therefore, these fndngs seem to confrm that there s a sgnfcant correlaton between unobservable determnants of sectoral choce and of effort response to extrnsc ncentves. These results reman n lne wth the hypothess of pro-socal motvaton of nonproft workers. Not surprsngly n the context of the Wooldrdge procedure, the chosen nstrument for NP - the predcted probablty of belongng to the non proft sector - passes the Lagrange Multpler verson of the Anderson canoncal correlaton test and the Cragg-Donald (1993) Wald test for under dentfcaton. Identcally, the F-test verson of the Cragg-Donald Wald statstc confrms that ths predcted probablty s not a weak nstrument Dscusson of the results One queston rased by the results presented n the prevous secton s that nonproft workers may be dfferent from for-proft workers n ther senstvty to the dscplnary effects of payment ncentves for another reason than pro-socal motvaton. In such a case, the estmated effect of workng n the nonproft sector would not reveal a hgher level of pro-socal motvaton but some other personalty dfferences between the two populatons of workers. Therefore, n ths secton we wll try to address ths ambguty usng another estmaton methodology. Our dea s to control for some unobservable trat, lke pessmsm or optmsm but dstnct of prosocal motvaton, that would affect the subjectve evaluaton of economc stuatons by the two groups of workers. If the ncluson of such a psychologcal characterstc explans the dfference between the 5 Ths dscrete varable has been transformed usng the COLS transformaton method descrbed above. 6 Note that, however, t does not exst proper test for evaluate the valdty of the excluded varable n Z n the frst step. In order to assess f the ntroducton of ths varable mproves the qualty of the model for nonproft sector choce, we dd estmate an IV model wth the Z varable as the proper nstrument of the partcpaton to the nonproft sector NP. In ths case, the underdentfcaton tests do not reject the hypothess that the nstrument s correlated wth the endogenous repressor NP. 13

16 senstvty of effort to payment ncentves between nonproft and for-proft workers, ths would rase doubts on our nterpretaton of prevous results n terms of pro-socal motvaton. Furthermore, f we can control for another ndcator that could capture for both ths psychologcal trat and the unobserved ntrnsc motvaton at work, we wll be able to assess f the latter s the man determnant of the lower senstvty of effort to payment ncentves n the nonproft sector. To fnd such ndcators, we follow a method orgnally proposed by van PRAAG et al. (2003) n a dfferent context. The procedure goes as follows. Frst, we wll take advantage of the evaluatons by the respondents of ther satsfacton wth certan aspects of ther lfe, known n the lterature as lfe doman satsfactons (LDS). In the EPICURUS data set, the followng domans of lfe are dstngushed: job, household ncome, house, health, the amount of lesure tme, the way n whch you spend your lesure tme, socal lfe, envronment, and famly lfe. These lfe doman satsfactons are estmated usng the COLS technque and from these regressons the error terms measurng the unexplaned part of the satsfactons are evaluated 7. Then an error covarance matrx s created and usng the frst prncpal component of the error covarance matrx, we generate a new varable f 2, whch capture the unobserved part that s common to all the error terms. Ths varable s thus capturng the unobserved ndvdual characterstcs that are common to all partal lfe doman satsfactons, such as optmsm and ntellgence for example, but not ntrnsc motvaton at work. Second, we repeat the same procedure wth the workers evaluatons of 14 job domans satsfactons (promoton prospects, total pay, relatons wth boss, securty of your job, use of own ntatve, the work tself, total workng hours, hours when you work (e.g. shft work, nght work), employer s behavour, work load, work tenson, level of job stress, and physcal rsk). Therefore, we generate another factor called f 1 whch captures the unobserved part common to all unexplaned part of the job doman satsfactons 8. Ths second varable wll not only measure ndvdual trats lke optmsm that nterferes wth subjectve evaluaton but also the ntrnsc motvaton at work. If nonproft workers derve specfc utlty from partcpatng to the producton of goods and servces devoted to ncrease socal benefts, they should report hgher levels of job domans satsfactons than ther for-proft counterparts. Usng these two factors, we have successfully estmated two versons of our econometrc model (3) supplemented respectvely wth factors f 1 and f 2,, therefore controllng for two dstnct sources of ndvdual heterogenety. The results are reported n Table 3 below. The frst row gves prevous the COLS estmaton of the nonproft dummy and serves as a benchmark. The next two rows dsplays the estmated values of the 7 The explanatory varables nclude ndvdual characterstcs lke martal status, age, gender, educaton levels, number of chldren under 16 years of age, household ncome, household ablty to save money from regular ncome. 8 The determnants of job domans satsfactons nclude the same set of explanatory varables as the one presented n tables A1 and A2. 14

17 coeffcents assocated wth the dummy nonproft and respectvely factor f 1 and f 2. Fnally, n the last three rows, we report the results of the estmatons when the nonproft dummy s nteracted wth the supplementary factor. Table 3: Senstvty of effort to actual and hypothetcal payment ncentves, controllng for two dstnct sources of unobserved worker heterogenety. Nonproft ** (0.078) Nonproft (0.085) f * (0.021) Nonproft (0.085) f (0.022) nonproft f ** (0.069) Effect of f n ** nonproft sector (0.066) f 1 (=1) f 2 (=2) Actual Hypothetcal Actual Hypothetcal *** (0.072) *** (0.078) (0.019) *** (0.078) (0.020) ** (0.064) ** (0.064) ** (0.078) ** (0.078) ** (0.020) ** (0.078) * (0.021) (0.064) ** (0.061) Note: Standard errors are n parentheses. Sgnfcant at ***1%, **5% and *10% levels *** (0.072) *** (0.072) (0.019) *** (0.073) (0.020) (0.062) (0.059) When factor f 1 s controlled for, the effect of the nonproft dummy on the senstvty of effort to actual payment ncentves dsappears, showng that the dfference between the two groups of workers s totally explaned by the supplementary factor, that s a combnaton of ndvdual characterstc common to all doman satsfactons, lke pessmsm, and of ntrnsc motvaton at work. We cannot from ths frst set of results dscrmnate between these two lkely nfluences. However, when we look at the results n column three, we notce that the ntroducton of factor f 2 that does not nclude the element of ntrnsc motvaton at work does not elmnate the dfference of effort senstvty between nonproft and for-proft workers. Hence, ths supplementary evdence seems to back up our prevous nterpretaton of the lower effcency of ncentve payments n nonproft sector due to pro-socal motvaton. Also, as further evdence, t s nterestng to note that the effect of factor f 1 s sgnfcantly negatve n ths sector only. When we examne the determnants of the senstvty of effort to the hypothetcal use of supplementary ncentve payments, the results tell a qute smlar story. Frst, the ntroducton of factor f 1 does not totally elmnate the effect of the nonproft dummy but sgnfcantly reduce ts magntude. Yet agan, the nfluence of f 1 s only sgnfcant for the nonproft workers corroboratng our 15

18 nterpretaton n terms of ther superor ntrnsc motvaton 9. Once more, the ncluson of factor f 2, whch s not supposed to be correlated wth the motvaton at work, modfes only margnally the extent of the dfference of senstvty of effort between the two groups of workers. Ths econometrc procedure shows that the relatve neffcency of payment ncentves n the nonproft sector s a robust phenomenon that cannot be explaned by non-work psychologcal dfferences between nonproft and for-proft workers. 7. Concluson In ths paper, we analyzed how effectve monetary ncentves are n nonproft and for-proft sectors. Evdence on ths topc s hard to assemble as data sources contanng nformaton about both ncentve schemes and the way employees of both sectors react to ther mplementaton are rare. The novelty of our approach les n the use of stated declaratons of employees concernng the mpact on ther effort of current and hypothetcal monetary ncentves. The results reveal that accordng to ther hgher pro-socal motvaton the effort of nonproft workers s sgnfcantly less senstve to current and hypothetcal monetary ncentves than the one of ther for-proft counterparts. To exhbt these results, our emprcal strategy has been performed n three steps. Frst, neglectng the fact that workers may self-select nto the nonproft sector accordng to the hgher pro-socal motvaton, we ran an OLS regresson. The OLS estmates hghlght a sgnfcantly lower mpact on effort of current and hypothetcal monetary ncentves for nonproft workers. Second, to address the ssue of selecton bas, we consdered the nstrumental varables approach descrbed by WOOLDRIDGE (2002). Takng account the selecton on unobservables makes the effect of belongng to the nonproft sector non sgnfcant on the senstvty of effort to current and hypothetcal monetary ncentves. Consequently, there are some unobserved varables nfluencng smultaneously and n the same way the sector choce and the senstvty of effort. Among these unobserved varables, there s the workers pro-socal motvaton. Therefore, ths result remans n lne wth the hypothess of hgher pro-socal motvaton of nonproft workers. However, these unobserved varables may also reflect some other personalty dfferences between nonproft and for-proft workers. In a thrd step, we tred to address ths ambguty usng an estmaton methodology based on the dea of omtted varable bas and generatng an ndcator whch captures the ntrnsc motvaton at work. The results reveal that the hgher pro-socal motvaton among nonproft workers s a robust 9 We also replcate the constructon of ths factor excludng satsfacton wth work load, work tenson, job stress and physcal rsk that may not be nfluenced by ntrnsc motvaton. Ths robustness check dd not change the qualtatve nature of the results dsplayed n Table 3 above. 16

19 explanaton to the dfferences of the senstvty of ther effort to current and hypothetcal monetary ncentves. In summary, the nonproft employees are more reluctant to react n a postve way to extrnsc motvator lke pecunary ncentves. We may nterpret these fndngs as an ndrect evdence of ther hgher ntrnsc motvaton comng from ther nvolvement n the producton of the nonproft sector. From that pont of vew, our study seems to confrm prevous emprcal analyss showng that nonproft frms are less lkely to mplement performance premum, mert pay or promoton. Moreover, our analyss shows that the eventualty of specfc pro-socal motvaton should be taken nto consderaton before exportng human resources management methods from one sector to another. References AURIOL E. and S. BRILON (2009), The Good, the Bad, and the Ordnary: Ant-Socal Behavor n Proft and Nonproft Organzatons, DP n. 73, CDSE, Unversty of Mannhem. BALLOU J. and B.A. WEISBROD (2003), Manageral rewards and the behavour of for-proft, governmental, and nonproft organzatons: evdence from the hosptal ndustry., Journal of Publc Economcs, 87(9-10), pp BENABOU R. and J. TIROLE (2003), Intrnsc and Extrnsc Motvaton, Revew of Economc Studes, 70, pp BENABOU R.. and J. TIROLE (2006), Incentves and Pro-Socal Behavor, Amercan Economc Revew, 96, pp BESLEY T. and M. GHATAK (2005), Competton and ncentves wth motvated agents, Amercan Economc Revew, 95(3), pp CARPENTER J. and C. KNOWLES MYERS (2010), Why volunteer? Evdence on the role of altrusm, mage, and ncentves, Journal of Publc Economcs, 94, pp CRAGG J.G. and S.G. DONALD (1993), Testng Identfablty and Specfcaton n Instrumental Varable Models, Econometrc Theory, 9, pp

20 DECI E.L. and R.M. RYAN (1985), Intrnsc motvaton and self-determnaton n human behavor, New York, Plenum Press. DECKOP J.R. and C.C. CIRKA (2000), The Rsk and reward of a double-edged sword: effects of a mert pay program on ntrnsc motvaton, Nonproft and Voluntary Sector Quarterly, 29, pp DEVARO J. and D. BROOKSHIRE (2007), Promotons and ncentves n nonproft and for-proft organzatons, Industral and Labor Relatons Revew, 60, pp FEHR E. and K.M. SCHMIDT (1999), A Theory of Farness, Competton and Cooperaton, Quarterly Journal of Economcs, 114, pp FEHRLER S. and M. KOSFELD (2010), Contracts for motvated Agents, Mmeo, Unversty of Zurch. FERRER--CARBONELL A. and P. FRIJTERS (2004), How Important s Methodology for the Estmates of the Determnants of Happness?, Economc Journal., 114, pp FRANCOIS P. and M. VLASSOPOULOS (2008), Pro-Socal motvaton and the delvery of socal servces, CESfo Economc Studes, 54, pp FREY B.S. (1997), On the relatonshp between ntrnsc and extrnsc work motvaton, Internatonal Journal of Industral Organzaton, 15, pp FREY B. S., GÖTTE L. (1999), Does pay motve volunteers?, Insttute for Emprcal Research n Economcs, Workng Paper Seres 7, Unversty of Zurch. GEORGELLIS Y., E.IOSSA, V TABVUMA (2010), Crowdng Out Intrnsc Motvaton n the Publc Sector, Journal of Publc Admnstraton Research and Theory, forthcomng. GREGG P., P. GROUT, S. RATCLIFFE, S.SMITH AND F.WINDMEIJER (2008), How mportant s prosocal behavour n the delvery of publc servces?, CMPO Workng Paper n 08/197. HEROLD F. (2010), Contractual Incompleteness as a Sgnal of Trust, Games and Economc Behavor, 68(1), pp

21 LANFRANCHI J., LARGUEM M. and M. NARCY (2010a), Sheddng new lght on ntrnsc motvaton to work: evdence from a dscrete choce experment., Kyklos, 63(1), pp LANFRANCHI J. and M. NARCY (2010b), Wages and effort n the French for-proft and nonproft sectors: the Labor Donaton Theory revsted, Workng Paper LEM, Unversté Panthéon Assas. LEETE L. (2000), Wage equty and employee motvaton n nonproft and for-proft organzatons, Journal of Economc Behavor and Organzaton, 43, pp MINKLER L. (2004), Shrkng and motvatons n frms: survey evdence on worker atttudes, Internatonal Journal of Industral Organzaton, 22, pp VAN PRAAG B. and A. FERRER-I-CARBONELL (2004), Happness Quantfed, Oxford Unversty Press, Oxford. VAN PRAAG B., P.FRIJTERS and A. FERRER-I-CARBONELL (2003), The anatomy of subjectve wellbeng., Journal of Economc Behavor and Organzaton, 51, p PRENDERGAST C. (1999), The Provson of ncentves n frms, Journal of Economc Lterature, 37(1), pp PRESTON A. E. (1989), The Nonproft Worker n a For-proft World, Journal of Labor Economcs. 7(4), pp PENNERSTORFER A. and U. SCHNEIDER (2010), What determnes the (nternal) wage dstrbuton n non-proft organzatons?, Kyklos, Vol63/4: pp ROOMKIN, M.J. and B.A. WEISBROD (1999), Manageral compensaton and ncentves n for-proft and non-proft hosptals, Journal of Law, Economcs and Organzaton, 15, pp RUHM C.J. and C. BORKOSKI (2003), Compensaton n the nonproft sector, Journal of Human Resources, 38, pp WEISBROD B. (1988), The Nonproft Economy, Cambrdge MA., Harvard Unversty Press. WOOLDRIDGE J. (2002), Econometrc Analyss of Cross Secton and Panel Data, The MIT press. 19

22 APPENDIX Table A1: COLS IV estmaton of the senstvty of effort to current and hypothetcal monetary ncentves Current monetary ncentves Hypothetcal monetary ncentves Varables Coeff. Se Coeff. Se Constant nonproft monthly wage (log) age *** *** weekly workng hours (log) * supplementary hours (log) female 0.115*** marred partner * permanent contract 0.123** ** Upper secondary educaton lower secondary educaton manager ntermedary hred ths year tenure less than 4 years 0.087* tenure 11 to 15 years tenure more than 16 years tranng n the year two jobs sze10_ ** sze25_ * ** sze100_ ** sze stressful job ** ** repettve job ** ** work ntensty 0.092*** *** no teamwork chance of promoton (cols) * good relatons wth boss good relatons wth colleagues use of own deas no work control bonus or stock optons 0.184*** mert pay 0.233*** ** end-of-year pay 0.167*** N R-squared Source: European Commsson, Epcurus Survey Note: The model also ncludes dummy varables for detaled servce ndustres and countres. Se: Standard errors. Sgnfcant at ***1%, **5% and *10% levels. 20

23 Table A2: Probt estmaton of the lkelhood to work n the nonproft sector Varables Coeff. Se Constant *** monthly wage (log) age 0.010** weekly workng hours (log) supplementary hours (log) *** female marred partner permanent contract *** upper secondary educaton lower secondary educaton manager ntermedary 0.357*** hred ths year tenure less than 4 years tenure 11 to 15 years tenure more than 16 years tranng n the year 0.250*** two jobs sze10_ sze25_ ** sze100_ ** sze *** stressful job repettve job 0.225*** work ntensty * no teamwork chance of promoton (cols) good relatons wth boss ** good relatons wth colleagues use of own deas 0.227** no work control bonus or stock optons *** mert pay end-of-year pay Housng satsfacton (cols) ** N Source: European Commsson, Epcurus Survey Note: The model also ncludes dummy varables for detaled servce ndustres and countres. Se: Standard errors. Sgnfcant at ***1%, **5% and *10% levels. 21