The wage differential between nonprofit institutions and corporations: Getting more by paying less?

In this paper, we suggest that lower wages in nonprofits may reflect a successful policy of generating trust by causing positive self selection in managerial employees of nonprofits. In this way, nonprofits resolve a major principal-agent problem. Our paper ties in three aspects of nonprofit institutions. First, nonprofits often emerge in markets which are characterized by asymmetric information and the need for consumer trust. Second, nonprofits tend to pay their employees, and especially managers, a lower wage than for-profits. Third, managers of nonprofits have very different characteristics from their counterparts in the for-profit sector, (C) 1998 Academic Press.