We experimentally examine how nonprofit pay levels affect nonprofit managers' misreporting and how different types of penalties deter such behavior. Absent any penalties for misreporting, we find similar levels of, but different mechanisms for, misreporting by managers who select into lower- versus higher-paying nonprofits. Specifically, lower-paying nonprofits attract mission-focused managers who misreport to advance their nonprofit's mission and justify doing so by their personal sacrifice of wealth, whereas higher-paying nonprofits attract a majority of self-focused managers who justify misreporting by focusing on their personal outcomes. Because managers who select into their nonprofit at different pay levels have different motivation and justification for misreporting, we predict and find that penalizing the nonprofit is more effective in deterring misreporting in lower-paying nonprofits, while penalizing the manager is more effective in higher-paying nonprofits. Our study contributes to theory on the behavioral drivers of nonprofit misreporting and informs practice of ways to deter it.

JEL Classifications: D91; J31; L31; M40.

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