Working Paper: CEPR ID: DP6350
Authors: Gani Aldashev; Thierry Verdier
Abstract: Is competition for donations between development NGOs good for welfare? We address this question in a monopolistic competition model à la Salop (1979). NGOs - defined by the non-distribution constraint - compete for donations from donors by exerting fundraising effort. If the market size is fixed, the free-entry equilibrium number of NGOs is usually larger than the optimal number. However, if the market size is endogenous and NGOs both compete and co-operate in attracting new donors, the free-entry equilibrium number of NGOs is generally smaller than the optimal number. If NGOs can divert a part of funds for private use, for a certain range of outside option of NGO entrepreneurs multiple equilibria (with high diversion and no diversion of funds) exist.
Keywords: Monopolistic competition; NGOs; Nondistribution constraint
JEL Codes: D43; L13; L31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Competition for donations (D64) | Excessive fundraising (H84) |
| Excessive fundraising (H84) | Overall welfare for beneficiaries (I31) |
| Entry of NGOs (L31) | Competition (L13) |
| Competition (L13) | Diversion of resources away from project implementation (F35) |
| Competition (endogenous market size) (L11) | Lower-than-optimal number of NGOs (L31) |
| NGO cooperation (L31) | Expansion of the donor base (F35) |
| Diversion of funds (H84) | Multiple equilibria (D59) |
| Excessive entry into the market (L11) | Welfare reduction (I38) |
| Dynamics of competition and cooperation (C73) | Overall welfare of beneficiaries (I31) |