Societal trust and the economic behavior of not-for-profit organizations

Date

2016

Journal Title

Journal ISSN

Volume Title

Publisher

University of Baltimore

Abstract

We study how societal trust impacts the behavior of non-profit organizations. Economic theory suggests that higher trust could be associated with either stronger or weaker managerial opportunism. In particular, higher trust could be associated with a lower perceived probability of being cheated which could, in turn, lead to lower levels of managerial opportunism. Alternatively, managers could take advantage of societal trust, which could manifest in more managerial opportunism in higher trust areas. While most of the for-profit literature finds evidence that higher trust is associated with lower levels of managerial opportunism, we find that in the not-for-profit setting the reverse is true. In particular, higher societal trust is associated with greater levels of administrative expenses, greater levels of executive compensation, and lower donor contributions among not-for-profit firms. However, we also find evidence that this positive association of societal trust and managerial opportunism is mitigated in the presence of more effective audit oversight. This underscores the importance of considering the role of both formal and informal institutions in the analysis of the behavior of various economic agents.

Description

Keywords

trust, non-profit organizations, Opportunistic Spending, Administrative Expense

Citation

Felix, R., Gaynor, G., Pevzner, M., & Williams, J. L. (2016). Societal Trust and the Economic Behavior of Non-Profit Organizations. Available at SSRN 2799466.

DOI