When Philanthropy Goes Wrong: The Role of Agency Problems and Poor Oversight

Many economic relationships are subject to agency (principal–agent) problems, that is, situations in which one party must rely upon a second party to accomplish a goal. This dynamic is especially apparent in philanthropy, where the donor (the principal) is typically removed from the recipient of the largesse (i.e., direct giving is not an option), and so an agent (the charity) must step in to provide the service. In this circumstance, the nonprofit’s management has more information than the donor and therefore more control over the funds. This imbalance can result in contributions being used in a manner that the donor did not intend, but it also opens the door to malfeasance. An analytical model is presented to demonstrate the divergent interests of contributors and nonprofit managers that reflect this unfortunate outcome. Potential solutions to the agency problem are presented, though several are applicable only to the largest of donors.