In this project the research team will examine how well an important institutional innovation -- voluntary regulation - addresses the information and reputation challenges faced by nonprofit organizations. Nonprofits are supposed to be trusted agents that serve the public interest. As a result, governments, international organizations, foundations, and citizens have channeled large amounts of funding to the nonprofit sector. Unfortunately, this funding, coupled with low entry barriers, has attracted some "bad apples" as well as legitimate organizations and the resulting public scandals have imposed negative reputational spillovers on all nonprofits. Voluntary regulation is one proposed mechanism to forestall this sort of problem.

This project will provide the first comprehensive and systematic data on nonprofit voluntary regulation program emergence and structure across two domains, in developing and transition nations and also within several nonprofit sectors in the United States. The data will be used to investigate which countries' and sectors' nonprofit organizations establish and join voluntary regulatory programs, as well as factors that account for variations in the scope and stringency of obligations such programs impose on their participants.

In terms of broader impacts, the systematic evidence and findings about the emergence, structure, and effectiveness of voluntary regulation programs that will be developed in this project can be used to build better public policy as well as to improve organizational governance.

Project Report

This project set out to examine how an important institutional innovation – nonprofit voluntary regulation programs or ‘voluntary clubs’ - has arisen to address the information and reputation challenges faced by nonprofit organizations. Voluntary programs work to provide information on nonprofit to external stakeholders. These programs require nonprofits to adhere to specific requirements, thereby providing signals about organizational policies to external stakeholders who cannot adequately observe the internal operation of nonprofits. This project provides the first comprehensive and systematic data on nonprofit voluntary program emergence and structure across two domains. First, the project collects and analyzes data on national voluntary program emergence and structure across developing and transition countries and transnational contexts. Second, the project constructs a dataset on voluntary program emergence across a subset of U.S. states. To complete the global analysis, we assemble an original dataset of 224 voluntary regulation programs in operation around the globe. We analyze program structure – in particular the use of monitoring and sanctioning mechanisms - across these settings. We find that programs in developing countries are weaker than those in industrialized countries, in spite of the larger information problems in these settings. We also find that national programs are typically stronger in terms of certification, monitoring and sanctioning than regional or international programs. Overall we find that the majority of programs have relatively weak certification systems along with weak enforcement via monitoring and sanctioning. The other component of this project looks at participation in voluntary programs by nonprofit organizations in the Pacific Northwest region, particularly participation in the Better Business Bureau’s Wise Giving Alliance (BBB/WGA) certification program. We assemble a longitudinal dataset of nonprofit participation in the BBB/WGA program from 2006-2011. We find that nonprofit participation in these programs is intermittent, as nonprofits often do not maintain consistent participation in the program. We find that participation in alternative rating systems, such as Charity Navigator, does not appear to affect program participation, but that older and larger organizations are more likely to participate. Unlike previous research, our results do not indicate the program participation results in higher donations in subsequent years. Interviews with nonprofit managers suggest a mixed set of motivations for program participation, but few managers have strong expectations that participation will result in higher revenues. Many smaller organizations report that the certification process has important learning outcomes for the organization. While the empirical data do not suggest systematic patterns in participation, we find managers in more market-oriented nonprofits find the Better Business Bureau sponsorship a credible signal, and many managers note the proliferation of clubs creates a plethora of standards that often cause confusion for nonprofit managers. Managers in larger organizations see less of a need for program participation, since they already have a strong brand. These managers view the reputational signal as reversed: they feel that their participation in voluntary programs actually lends credibility to the program itself. Overall our results highlight the challenges of creating strong reputational signals through nonprofit voluntary programs. Many programs seem unlikely to provide a signal strong enough to help outside stakeholders to differentiate legitimately "good" nonprofits from opportunistic ones. This has important consequences for policy. For one, the proliferation of less stringent clubs, instead of simplifying stakeholders’ search for legitimate nonprofits, adds a layer of complexity as stakeholders now have to distinguish between credible clubs and less credible ones. This may mean that self-regulation initiatives are not a good alternative to government regulation of the nonprofit sector. Or it may mean that governments need to become more involved in sponsoring and hosting these voluntary initiatives. In either case, our work highlights the challenges of creating strong signals through voluntary effort.

National Science Foundation (NSF)
Division of Social and Economic Sciences (SES)
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Erik Herron
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University of Washington
United States
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