Donors' responses to profit incentives in the social sector : The entrepreneurial orientation reward and the profit penalty

This study uses an online survey experiment to test whether the pairing of profit-seeking with mission-related programs in the social sector attracts or deters donations from individual donors. We test individuals’ response to three types of profit incentives allowed under current U.S. public policy: (1) non-distributed profit to an organization, which is allowed for nonprofit entities; (2) profit to the organization's equity investors and owners, which is allowed under for-profit social enterprise governance charters; and (3) profit to lending investors, which is introduced by social impact bonds, a pay-for-success policy tool. We test trust theory, under which profit incentives deter donors against entrepreneurial orientation (EO) theory, which suggests that donors are attracted to organizations that use innovative, market-driven programs. Findings indicate support for both theories, but the support depends on how the specific profit incentive is structured. Donors support organizations that use profit-generating social enterprise programs—but only when the profits are non-distributable; donors’ support is significantly lower for social enterprises in which owners and equity investors may profit. Importantly however, this negative effect is not found for pay-for-success policy tools where lending investors, rather than equity investors and owners, receive profits.