Venture philanthropy under asymmetry of information

Résumé

Venture philanthropy is a funding system that consists not only in giving money to a non-profit organization, but also in providing advices and expertise in the long-run. The selection of the right beneficiary is the most important task of a venture philanthropist and aiming to support a beneficiary that shares the same willingness in terms of improvement of output is the main key to success and efficiency. However, it is feared that the increasing competition for funds in the non-profit sector pushes non-profits organizations which do not share this willingness to pretend the contrary just to survive on the market. Added to a world of asymmetry of information, the selection of the right beneficiary would be then clearly compromised and hence, the impact of venture philanthropy. I use a model of signaling close to the one of Spence (1973) with organizations differing in terms of willingness to change, competing for funds and allowed to lie on their type through reports of previous output. I show that such a jeopardized behavior is never observed, but that it is non-profits sharing the same motivations as the venture philanthropist that have a higher incentive to hide their type. Therefore, it implies that an altruistic donor should use venture philanthropy only if non-profits are slightly different in terms of willingness to change, and on the contrary, that a warm-glow donor would met his expectations when non-profits are very similar.