Understanding and Mitigating Misreporting in Nonprofits: The Joint Effects of Manager Pay Level and Nonprofit Penalty

• In Event: Penalties for Misreporting

Abstract

Using an incentivized experiment, this study examines how the manager pay level contributes to nonprofit misreporting by attracting different types of managers and the mitigating effect of imposing penalties on misreporting nonprofits. We posit that lower-paying nonprofits attract mission-driven managers who are motivated to misreport to advance their nonprofit’s mission and justify their actions by their sacrifice of wealth. In contrast, higher-paying nonprofits primarily attract economic-driven managers who have lower preferences for honesty and justify misreporting by focusing on the personal costs and benefits of their actions. Our results indicate that when misreporting nonprofits receive no penalty, managers in lower- versus higher-paying nonprofits misreport at similar levels. However, imposing possible penalties on misreporting nonprofits significantly reduces misreporting in lower-paying nonprofits, but not in higher-paying nonprofits. We attribute this result to mission-driven managers finding it more difficult to justify their misreporting when doing so can hurt their nonprofits. Our study contributes to theory on the behavioral drivers of misreporting in the nonprofit sector, and it informs practice regarding the effects of rising pay levels on nonprofit managers’ reporting decisions and the effectiveness of penalties in mitigating misreporting.

Authors

• Xinyu Zhang, Cornell University

• Eric W Chan, University of Texas at Austin