Accountability in the NGO–donor relationship

The NGO–donor dynamic can be thought of as a classic principal–agent relationship (Cooley and Ron Reference Cooley and Ron2002). NGOs face constant pressure to please donors in order to maintain funding and continue to pursue their policy goals. Donors, on the other hand, must decide in which NGOs to invest. Donors can ill afford to waste their money on ineffective or low-quality NGOs (Ebrahim Reference Ebrahim2002, Reference Ebrahim2003, Reference Ebrahim2005; Jordan Reference Jordan2005; Wenar Reference Wenar2006; Rubenstein Reference Rubenstein2007; Boulding Reference Boulding2009; Gugerty Reference Gugerty2009; Reinhardt Reference Reinhardt2009; Bush Reference Bush2015). Critics of this principal–agent lens argue that the framework is inappropriate because the donor and the organization have the same preferences (Barnett and Finnemore Reference Barnett and Finnemore1999) or that NGOs exhibit behavior that is more consistent with sincere preferences than strategic behavior (Büthe et al. Reference Büthe, Major and De Mello e Souza2012). Even if we assume the donor and NGO have the same ideological preferences, donors are unable to determine if the organization they are supporting is capable of pursuing these goals effectively. This uncertainty is critical to understanding the motivations of donors and their push for accountability.

Grant and Keohane (Reference Grant and Keohane2005, 36) claim that ‘reputational effects are involved in all issues of accountability.’ Actors strive to build a reputation in order to distinguish themselves from the crowd by establishing an identity or brand. Boulding (Reference Boulding2009) reaffirms that donors desire to select high-quality NGOs and stresses the role that information asymmetries play in creating uncertainty for the donors. While an NGO has the necessary information about its abilities and objectives, the NGO faces the challenge of credibly revealing information about its capabilities to donors. NGOs have an incentive, then, to signal high capability through actions and outcomes rather than through (cheap) talk. Gugerty (Reference Gugerty2009) emphasizes that the information asymmetry between donors and NGOs creates distrust. As donors cannot readily distinguish between low-quality NGOs and high-quality NGOs, they become skeptical of all NGOs. To resolve the information asymmetry and ensure selection of high-quality NGOs, donors look for measurable signs of performance success. In a review and analysis of the performance evaluation tools used by NGOs and donors, Agyemang et al. (Reference Agyemang, Awumbila, Unerman and O’Dwyer2009) discuss 10 popular reporting techniques, only one of which (newsletters) do not necessarily include quantitative measures of NGO performance. As the preceding makes clear, not only are the objectives of the NGO important to donors, but also, donors care about their ability to observe and quantify the extent to which an NGO will achieve its goals.

Underlying the logic of improving accountability and the overall efficiency and competitiveness of NGOs is the notion that there is an emerging marketplace of NGOs that will naturally improve their outputs. Cooley and Ron (Reference Cooley and Ron2002), however, challenge the notion that a competitive supply of NGOs will unequivocally improve transparency. Instead, they argue that such competition can lead to increased problems of uncertainty and NGO insecurity. As Cooley and Ron (Reference Cooley and Ron2002, 13–14) explain, ‘The more that nonprofit groups attempt to secure and maintain contracts under market-generated pressures, the more they will copy the structures, interests, and procedures of their for-profit counterparts.’ Wenar (Reference Wenar2006, 7) asserts that for these NGOs the drive for accountability can influence their behavior by shifting focus to ‘satisfying certain bureaucratic requirements instead of pursuing its underling mission.’ An emphasis on accountability discourages NGOs from taking on more difficult projects and hinders NGO effectiveness (Wenar Reference Wenar2006, 16–17). While accountability measures are used to ensure that NGOs are using donors’ contributions wisely, they often generate negative externalities as well, decreasing the effectiveness of the organizations (Agyemang et al. Reference Agyemang, Awumbila, Unerman and O’Dwyer2009).

NGOs face a difficult task in generating effective accountability procedures that satisfy donors. Donors also face a challenge in judging the performance of NGOs (Gutner and Thompson Reference Gutner and Thompson2010). As donors cannot easily evaluate the performance of NGOs, donors must focus on outcome-based metrics to assess whether or not an NGO meets expectations. Gutner and Thompson point to ‘definable and measurable’ outcomes that are used by donors to assess NGO performance. Similarly, Bush (Reference Bush2015) argues that measurable programs are preferable to donors, particularly when donors are not able to directly observe the programs or are not equipped to evaluate the program’s effect on the long-term policy objectives of the organization. Ebrahim (Reference Ebrahim2002) also notes the importance of easily quantifiable measures of success and failure; in order to keep NGOs accountable, donors conduct reviews that highlight short-term, measurable results while ignoring the NGOs’ contributions to more durable goals. These reviews help assuage donor concerns, but generate tension between donors and NGOs. Elaborating on these tensions, Ebrahim (Reference Ebrahim2003, 817) states, ‘First, there are conflicts among NGOs and funders over whether they should be assessing processes such as “participation” and “empowerment” or whether they should measure more tangible products such as numbers of schools built, trees planted, and land area irrigated. For the most part, donor appraisals tend to focus on products.’ Agyemang et al. (Reference Agyemang, Awumbila, Unerman and O’Dwyer2009) cites interviews with NGO officers where officers express concern that the focus on quantitative measures of progress discourages less easily measured qualitative indicators of NGO activity and effectiveness. Therefore, the push for accountability tends to focus on immediate, tangible successes instead of the overall long-term program impact.

Two final observations are worth noting to help motivate our argument. First, the natural uncertainty that emerges from the principal–agent problem can cause NGOs to perceive their reputation as a worthy investment. The push for accountability shapes this reputation building, driving NGOs to behavior that is observable and attributable to the organization. Why this uncertainty persists over time, however, remains unclear. We still need an explanation of why rational, talented donors find themselves stuck focusing on metrics that may introduce friction in the pursuit of the policies that donors and NGOs want to achieve. Second, not all NGO goals are undone by these strategic constraints (Büthe et al. Reference Büthe, Major and De Mello e Souza2012). In other words, the question remains as to when NGOs are meaningfully hobbled by their relationship with donors.

In the theory that follows, we identify a specific path by which NGOs become strategically stuck, so to speak, constrained to prioritize attribution over other qualities in their policy actions. We then show how the context of an NGO’s activity affects policy durability, which can exacerbate the costs of pursuing attribution and trigger the reputation trap.

NGOs

We assume that NGOs are first and foremost interested in survival, by which we mean the ability to pursue their goals. NGO survival requires resources, therefore the organizations want to maximize their ability to attract funding from donors. This does not imply that NGOs are money-driven enterprises. NGOs clearly have a strong desire to reach policy goals. Without funding, though, NGOs could not continue to operate and thus would not have a chance to pursue any policy goals.Footnote ⁶ By assuming that NGOs are primarily motivated by survival, we can theoretically isolate the effects of reputation from other potential motivating factors for NGO behavior. However, we should emphasize that one can indirectly incorporate NGO policy preferences into the model we develop below through the NGO’s cost term. All else equal, the more that an NGO cares about a policy, the lower its marginal costs of effort will be. Thus, as long as one does not assume that altruism or policy salience leads NGOs to always pursue high effort in achieving immediate policy successes, our model can take into account both the monetary and policy interests that influence NGO decision making.

NGOs may share similar motivations, but they often vary in quality. Depending on the talent and expertise of their personnel, their organizational structures and procedures, as well as other characteristics, some organizations are more effective and efficient at pursuing policy goals than others. In our model, we assume that an NGO can be one of two types: high quality or low quality. High-quality NGOs have a better ability to produce successful policy outcomes than low-quality NGOs. For mathematical simplicity, our model assumes that only high-quality NGOs can achieve policy successes. However, similar strategic incentives hold if we allow low-quality NGOs to achieve policy successes, as long as the probability that a low-quality NGO can achieve policy successes is less than that of a high-quality NGO for a given level of effort.Footnote ⁷

A central assumption of our model is that the quality of an NGO can change over time. For example, the director of an NGO may exit the organization, handing over the organization to new leadership who may be more or less skilled than her predecessor. On the opposite end of the NGO hierarchy, large turnover among staff could decrease the quality of the organization until new staff is properly trained. In addition, new technology could be discovered or acquired by the organization, improving productivity and efficiency. We call an event that can potentially alter an NGO’s quality a ‘shake-up.’ Such shake-ups are always possible in an NGO, and they complicate a donor’s task of targeting funds to high-quality organizations.

Donors

We assume that donors want to maximize the achievement of their policy goals through their investment in an NGO. Whereas the typical discussion of investment centers around returns and profit, here the returns are policy outcomes. All else equal, the donor prefers to invest in NGOs that are more likely to succeed in obtaining favorable policy outcomes. In our model, we assume that donors focus on achieving policy success in the current funding cycle. This often means a fiscal year, but the model is designed to handle any length of time. We simply wish to reflect the reality that donors will evaluate an NGO’s policy success before making the decision to fund again.

We expect that donors want to avoid funding low-quality NGOs. Given their uncertainty about NGO quality, donors will want to see what an NGO accomplishes in a given period before they consider whether to renew an NGO’s funding. In addition, those who make funding decisions are themselves often accountable to others and need to demonstrate a positive return on their investment decisions to maintain their status. For example, the United States Agency for International Development is a major donor for development NGOs, but its lead administrator is appointed by the President, approved by the Senate, and advised by the Secretary of State (all of whom are agents themselves). For simplicity, we treat donors as principals in this analysis.Footnote ⁸

A key characteristic of the donor–NGO relationship is the specter of donor uncertainty about the NGO. In our model, we incorporate three potential sources of uncertainty that donors can face. First, donors are often uncertain about the quality of an NGO. The ability of an NGO to achieve positive policy outcomes is partially a function of intangible factors that donors cannot readily observe. The donor’s knowledge and understanding about an NGO’s quality is complicated by the fact that an organization’s quality can change over time through shake-ups. Second, when making funding decisions, donors do not know whether an NGO will suffer a shake-up in the upcoming period that will lead to a shift in the organization’s quality. If such a shift occurs, the donor’s belief about an NGO’s quality when it makes a funding decision will not be an accurate estimate of the NGO’s quality later in the funding cycle. Finally, while the donor can observe the immediate policy outcomes of the NGO’s activities, given that the donor is not on the ground at all times, the donor often cannot observe the level of effort the NGO puts into achieving its goals. NGOs, like any other type of organization, must make decisions about how to allocate their resources. An NGO can implement programs to advance its policy aims or, for example, invest in administrative capacity, infrastructure, and marketing. While third parties have emerged to mitigate this particular information problem, they are not able to completely and immediately eliminate the privacy of this information.

To be clear, donors are aware of this information problem and often take steps to mitigate its effects. For example, one donor firm, Good Ventures, has led the creation of the Open Philanthropy Project to improve donor effectiveness and cultivate a community of open information for donors to share. This project represents one of the most novel and purposive efforts to reduce donors’ uncertainty about the quality of their investments. Even so, the project’s architects state plainly that ‘all else equal, we prefer to do good quickly because helping people empowers them to help themselves and others.’Footnote ⁹ One of these architects, philanthropist Cari Tuna states, ‘a well-placed donation can transform someone’s life, but a poorly placed donation can have no impact or even do harm. … But it’s not at all obvious from charities’ marketing which are the best buys’ (Cha Reference Cha2014). When donors decide where to invest, they face a multidimensional challenge; NGO quality is one of many issues. The scope of information needed ranges from identifying the most pressing problems currently facing the world to understanding how the political environment will affect the success of the investment. Donors can choose to spend time and money on solving the NGO quality issue, but this creates opportunity costs. Since resources are finite, donors would in turn have less time to devote to researching other dimensions of their overall due diligence and fewer funds available to invest in the policy problem itself. Our model is most appropriate for situations where donors have not fully overcome the information problem with respect to NGO quality.

Uncertainty can inhibit the ability of the donor to maximize the policy returns from its investment in an NGO. If the donor is uncertain about the quality of NGOs, it cannot easily direct its resources to the highest quality organizations. A donor may end up funding an NGO that does not have the ability to produce successful policy outcomes. Known as adverse selection, this problem emerges when a principal is not able to select the type of agent that it would choose if it had complete information. Since the donor cannot always observe the behavior of the NGO, the donor is not able to condition its funding on the NGO’s actions. There is a chance that the NGO will put less effort into achieving the donor’s goals than the donor would ideally prefer. This problem, which is known as moral hazard, results from the inability of a principal to perfectly monitor its agent. These classic principal–agent problems are the underlying motivation for the push for greater accountability from NGOs.

We argue that reputation is a mechanism that emerges to address the principal–agent problems between donors and NGOs. We conceptualize reputation as the donor’s belief that an NGO is of high quality. Since the donor cannot fully observe the NGO’s ability to succeed before providing funding, the donor must be concerned with the reputation of the NGO. As donors prefer to fund organizations with good reputations, NGOs have an incentive to invest their time and energy into establishing and maintaining such a reputation. In the model developed below, an NGO’s reputation is largely a function of its record of policy success. Since high-quality NGOs are better able to achieve successful policy outcomes, such achievements provide signals that bolster the reputation of the NGO in the eyes of the donor. Given this, donors steer funding to organizations that have demonstrated the ability to produce positive outcomes. This provides NGOs with an incentive to put effort into activities that will lead to observable, attributable policy successes in the immediate term. While such an incentive structure can help donors overcome problems of adverse selection and moral hazard, it can potentially create a new problem. As we explore below, when the types of accomplishments achievable by an NGO in the short term are not durable, NGOs and donors can find themselves in a reputation trap.

Shake-ups, reputations, and the consequences of persistent donor uncertainty

Our theoretical model includes two players, a donor (the principal) and an NGO (the agent). The NGO can be one of two types (τ): high quality (H) or low quality (L). High-quality NGOs have the ability to pursue successful policies, while low-quality NGOs do not. At the beginning of the game, Nature chooses the type of the NGO. The NGO is high quality with probability θ∈(0, 1) and low quality with probability 1−θ. Similar to many game-theoretic models of firm reputation, we assume that the principal is uncertain about the type and actions of the agent (Fudenberg and Levine Reference Fudenberg and Levine1992; Mailath and Samuelson Reference Mailath and Samuelson2001).Footnote ¹⁰ Thus, while the NGO learns its type, the donor does not.

In each period, the donor decides whether to fund the NGO. If the donor chooses not to fund, the NGO ceases to exist and the game ends. If the donor funds, it transfers a lump sum, f, to the organization. A high-quality NGO then decides the level of effort to put into achieving a successful policy outcome in that period. In particular, it can expend a high level of effort (h) at a cost e>0 or a low (l) level of effort at no cost.Footnote ¹¹ To allow for the possibility that the NGO would be willing to exert high effort, we assume that the cost of high effort does not exceed the per-period funding available from the donor (i.e., e⩽f). Formally, we assume that a low-quality NGO can only expend a low level of effort, which is equivalent to assuming that the probability of policy success for a low-quality NGO is equal to the probability of success for a high-quality NGO exerting a low level of effort. The donor does not observe the amount of effort expended by the NGO.

After the NGO chooses the level of effort, Nature then determines the policy outcome for the period, which can be either successful or unsuccessful. If the NGO chooses a high level of effort, there is a successful outcome in the current period with probability π and an unsuccessful outcome with probability 1−π. For simplicity, we assume that low effort always results in an unsuccessful outcome.Footnote ¹² The policy outcome is observed by all players. We assume that donors receive a payoff of 1 for a successful outcome and 0 for an unsuccessful outcome. NGOs do not receive any direct payoff for the policy outcome.

Play continues until the donor decides not to fund the NGO. In all subsequent periods after the first, we assume that there is the possibility of an exogenous shake-up in the NGO after the donor’s funding decision with probability λ. For example, there could be a change in personnel of the NGO or a technological change. In the event of a shake-up, Nature redetermines the NGO’s type. In particular, after a shake-up, the NGO is high quality with probability θ and low quality with probability 1−θ. We assume that the donor knows the probability that a shake-up will occur in a given period but that the donor does not observe the shake-up. Finally, since we assume that the donor is focused on the achievement of policy successes in the current period, it has a discount factor of 0. We expect that donors will be interested in getting a return on their investment in a given period before they consider whether to renew an NGO’s funding. On the other hand, since the NGO is concerned with survival, it discounts future payoffs with a discount factor δ∈(0, 1).

Given that we assume that the donor has a discount factor of 0, we limit our analysis to Markov strategies, which only depend upon payoff-relevant histories. Let μ be the donor’s belief that the NGO is high quality, and let σ(μ) be the probability that a high-quality NGO will exert high effort given that belief. Then the donor expects to receive a successful policy outcome in a given period with probability P(μ)=μσπ. Since the utility of a successful outcome is 1, the donor will choose to fund if P(μ)⩾f.

Consider a situation in which high-quality NGOs always exert high effort into achieving immediate policy successes. In this case, policy outcomes can provide information about the NGO’s quality. The donor’s posterior belief that the NGO is high quality in a given period is a function of its prior belief, the policy outcome in the previous period, and the probability of a shake-up. After a successful policy outcome, the posterior belief is:

Since only high-quality NGOs can be successful, a successful outcome in the previous period indicates that the NGO was high quality in the previous period. However, there is some probability, $\lambda (1{\minus}\theta $ ), that a shake-up in the current period will result in the the NGO being low quality. Thus, if $$\lambda \,\gt\, 0$$ , the donor can never know with certainty whether the NGO is high quality in the current period. On the other hand, the donor’s posterior belief that the NGO is high quality after an unsuccessful outcome is:

If 0<μ<1, μ _s >μ _u . Thus, as long as there is uncertainty about the NGO’s quality, the donor’s belief that the NGO is high quality is higher after a successful policy outcome than after an unsuccessful outcome. In addition, it can be shown that the donor’s belief that the NGO is high quality decreases after an unsuccessful outcome. If we let $\hat{\mu }$ be the fixed point at which μ _u =μ (such that $0\,\lt\, \hat{\mu }\,\lt\, 1$ ), it follows that the $\hat{\mu }$ is the lowest possible belief about the NGO’s quality that the donor can have.

If there is no possibility of a shake-up (i.e., $\lambda =0$ ), a high-quality NGO will never choose to exert high effort into immediate policy successes. To see why this is the case, consider the situation in which the donor believes the NGO to be high quality (μ=1). In this case, μ _s =μ _u =1. As the donor assumes that any unsuccessful outcome is due to bad luck, rather than low effort, it will believe the NGO to be high quality regardless of the policy outcome. Thus, the NGO has no incentive to put effort into short-term policy successes since it would be funded in any case. In addition, there cannot be an equilibrium in which the high-quality NGO chooses low effort when μ=1 but chooses high effort at other values of μ. In such an equilibrium, the donor would not fund if μ=1. Since μ _s =1, the NGO knows that it will not be funded in the next period if there is a successful outcome. Given this, the NGO would have no incentive to pay the cost of high effort because it would cease to exist after a successful policy outcome. Thus, similar to the findings of Mailath and Samuelson (Reference Mailath and Samuelson1998, Reference Mailath and Samuelson2001) in a model of firm reputation, separation between ‘competent’ and ‘inept’ firms can only occur if there is perpetual uncertainty about the firm’s type. In our model, this implies that high effort by high-quality NGOs can only occur in equilibrium if $\lambda \,\gt\, 0$ . The next proposition identifies the conditions under which there will be high effort.

The formal proof of the proposition can be found in the Appendix. The intuition is as follows. If high-quality NGOs exert high effort, the donor will be more willing to fund high-quality NGOs than low-quality NGOs. Thus, the donor’s equilibrium strategy will depend upon its belief that the NGO is high quality. In particular, there will be a cutpoint, μ*, such that the donor will fund if μ⩾μ* and not fund otherwise. Owing to the possibility of a shake-up in each period, the donor can never know the NGO’s type with certainty. Since successful outcomes are only possible with high-quality NGOs, the donor’s belief that the NGO is high quality is higher after a successful outcome than after an unsuccessful outcome. As the NGO would prefer to maintain its funding, it has an incentive to prevent the donor’s belief from falling below μ*. Since, in expectation, higher effort will produce a higher belief than lower effort, the NGO will pursue a high level of effort if the cost is sufficiently low.

Reputation dynamics

The theoretical model provides insight into the role that reputation can play in the relationship between donors and NGOs. One can consider the parameter μ, the donor’s belief that the NGO is high quality, to be the NGO’s reputation. As donors cannot directly observe the quality of an NGO, they must make their funding decisions based upon an NGO’s reputation. In particular, donors are only willing to fund NGOs with good reputations (μ⩾μ*). If an NGO’s reputation falls too low, a donor will no longer provide it funding.

In the model, an NGO’s reputation is based upon its record of policy successes. As donors cannot directly observe all of the actions of an NGO, they do not know the precise effort level that the NGO puts into particular activities. However, they can observe whether the NGO’s efforts lead to policy successes. For example, a donor might not know how much effort an NGO put into mediating a civil war, but it can observe whether the mediation led to a peace agreement. Since high-quality NGOs are better able to produce policy successes, the nature of an NGO’s policy outcomes provides valuable information to donors. For this reason, a donor will update its belief about the quality of an NGO after each policy success or failure. If an NGO achieves a policy success, the donor recognizes that the organization is high quality and updates its belief positively, and the NGO gains a good reputation. On the other hand, a series of policy failures would gradually erode the NGO’s reputation. After a sufficient number of failures in a row, the donor will begin to believe that the NGO is low quality and will move to cut off the NGO’s funding.

Reputation dynamics in turn influence the behavior of NGOs. Since a donor’s belief about an NGO’s quality is a function of the NGO’s history of policy successes, an NGO’s achievements in a given period will influence its reputation in the eyes of the donor in all future periods. To maintain its funding from donors, an NGO needs to build and maintain a good reputation. Thus, it has an incentive to put effort into achieving policy successes in the current funding cycle that can be attributed to the organization. By doing so, the NGO will be able to signal its quality to the donor before it makes its next funding decision. If the NGO were instead to pursue activities that do not produce any positive results in the current funding cycle or that only produce results that could not be attributed to the NGO, the donor would downgrade its belief about the NGO’s quality and would be less willing to continue funding in the future.

The reputation process can provide a useful accountability mechanism for donors and allow them to make more informed funding decisions. Given the information asymmetries inherent in donor–NGO relations, donors aim to avoid problems of adverse selection, in which they fund low-quality NGOs, and moral hazard, in which NGOs fail to put sufficient effort into the donor’s policy goals. The NGO’s incentive to develop a reputation can reduce some of the donor’s uncertainty. If the donor knows with certainty that an NGO is high quality, there is nothing for the NGO to prove, as there is no outcome that would decrease the donor’s belief that the NGO is high quality. If there is always a possibility for a shake-up in the organization – due to staff turnover or new challenges in the international policy arena – the donor can never know with certainty the quality of the NGO. This gives the NGO an incentive to put effort into achieving attributable policy successes to maintain a good reputation. When no such uncertainty exists, there is no need for NGOs or donors to worry about reputation.

When will reputation traps emerge?

NGOs and donors can find themselves in a reputation trap, but that is not to say that such traps are ubiquitous. For a trap to emerge, two conditions must be met. First, donors must have an incentive to use an NGO’s reputation as the basis for its funding decisions. This condition is easily met and widely present in donor–NGO relations. Though, we expect that reputation concerns will be particularly salient when donors and NGOs establish new partnerships and when NGOs are young, beginning work in a new geographical area, or tackling a new type of problem. Second, once established, this reputation mechanism must incentivize NGOs to pursue less durable policy successes. This second condition is not always present and not always under the control of either party. The former condition is largely a function of the donor’s level of uncertainty, while the latter is likely to vary based upon the issue area being addressed.

We recognize that even if donors base their funding decisions on NGO reputation and NGOs focus their activities on reputation maintenance, this will not lead to a reputation trap if NGOs can pursue durable policy successes. However, one would expect that many potential NGO activities do not lead to immediate policy successes that can be attributed to the NGO. The overall objectives of international NGOs are often ambitious, and achievement of these long-term goals is not arrived at quickly. Moreover, it is often difficult to attribute macro-level social, economic, and political outcomes – such as life expectancy, infant mortality, economic development, and democratization – to the activities of an individual NGO. In some situations, the immediate policy success that NGOs can achieve may not have such long-term benefits. In these cases, attributable policy outcomes tend to be less durable than those that are not attributable to the actions of an NGO.

It is reasonable to question the extent to which NGOs and donors have control over this overlap between attribution and durability. The reputation trap is most pernicious when there is little or no overlap and NGOs find themselves compelled to pick attribution at the expense of lasting policy success. We expect that the extent of the overlap between attribution and durability varies by issue area. In some issue areas, short-term successes may not effectively help NGOs reach long-term goals. In these cases, donors and NGOs find themselves in a reputation trap (as seen in our discussion of water NGOs). In issue areas where there is considerable overlap between attribution and durability, however, organizations may be able to tailor their policy outputs to be recognizable without abandoning durability (as seen in HDC’s actions in Aceh).

Recognizing vs. avoiding traps

By now the reader might be wondering why donors cannot simply recognize that their emphasis on accountability can trigger the reputation trap and take steps to mitigate the problem. After all, donors should be aware of the potential durability of the policies pursued by NGOs, and therefore, donors should know when their accountability policies are leading NGOs into the reputation trap. One solution would be to provide long-term (multi-period) funds to the NGO in order to free the NGO from the constraints of immediate attribution. Long-term funding would relieve the pressure to prioritize attribution over durability, but it would also exacerbate the moral hazard problems that caused donors to focus on accountability in the first place. As shake-ups can occur at any time, the donor is always concerned that a high-quality NGO suffers an unexpected quality shift which leads to a squandering of precious funds.

Alternatively one might turn to organizational structure as a way to overcome the reputation trap. One solution could be to absorb the NGO into the donor’s organization in a sort of vertical integration. However, this will not necessarily solve the principal–agent problem, nor would it stop the push for accountability. Perhaps a more promising solution to mitigating the reputation trap would be for the NGO to develop a dualist structure, in which one part of the organization focuses on signaling quality to donors though immediate successes while the other part of the organization focuses on achieving more durable (but less attributable) outcomes. Such a dualist strategy has been effective for many intergovernmental organizations (Hawkins and Jacoby Reference Hawkins and Jacoby2006), and it may be a viable option for some large NGOs. However, many of the younger and smaller NGOs that are most likely to face reputation traps will often not have the capacity to build such a dual structure, especially when they are initially building their reputations. Moreover, such a solution does not completely eliminate the reputation trap, as NGOs would still need to spend significant effort on achieving less durable policy outcomes.

We do not know of a silver bullet solution to the reputation trap problem, but we suspect that donors struggle with the decision of how much of their resources to devote to solving the problem of uncertainty. When there is little uncertainty on the party of the donor about the quality or actions of an NGO, there is less need for a reputation mechanism. In those cases, donors may be able to create alternative incentive structures that are primarily aimed at producing durable outcomes. Reducing uncertainty is costly, however, and spending too much on achieving a reduction in uncertainty can place important constraints on donor budgets.

With this conundrum in mind, the next step is to illustrate when and why the reputation trap is sprung on donors and NGOs. In the next section, we provide two empirical illustrations of the reputation mechanism focusing on the tradeoff between attribution and durability. In one case, the need for attributable outcomes produces a reputation trap in which short-term achievements do not have a durable policy impact. In the second case, while the NGO seeks to build and protect a reputation through short-term tangible successes, the short-term pursuits of the NGO are compatible with the NGOs long-term policy goals; this case highlights the importance of reputation to NGOs (and their donors), even though the reputation trap is not triggered. Finally, we conclude with a brief discussion as to how NGOs and donors can alleviate the trap.

Water NGOs and boreholes

There are 748 million people who struggle to find safe drinking water each day, while close to 2.5 billion people do not have adequate access to proper sanitation (UNICEF 2014). Without access to clean water and proper sanitation, populations become susceptible to diarrhea, intestinal infections, and, more broadly, malnutrition. Given the challenges and risks posed by unsafe water and inadequate sanitation, a number of NGOs have arisen to increase access to safe and clean water. In what follows, we illustrate how water NGOs have suffered from a constant reliance on short-term solutions to water shortages and how this reliance is motivated, at least in part, by the need to signal attributable successes to their donors.

Boreholes are the most widely used technique in solving water access problems. In the following case, we explain that boreholes are easy and relatively cheap to implement; moreover, they produce results that NGOs can show to their donors. Despite these advantages, however, boreholes have known and documented failures that hinder the long-term development of sustainable clean water access (see, e.g., Harvey Reference Harvey2004, 339). More durable solutions, such as research and extensive local training, require greater resources and more time to implement. More importantly, the improved outcomes from such solutions are less attributable to the NGOs. While effective at combating unsafe water in the long term, more durable solutions, such as research or local training, require the active engagement of many actors. Thus, these complex projects send noisy signals to donors about NGOs’ effectiveness and quality. Noisy signals do little to alleviate donor concerns about their funding being used effectively by water NGOs and thus do not serve as sufficient accountability mechanisms. The water case illustrates that high-quality water NGOs continue to dig new boreholes at the expense of devoting scarce resources to maintenance, infrastructure, and training. Instead, they focus on immediate, attributable results in order to signal their reputation, and thus their worthiness for continued funding.

Many areas suffering from limited clean water access have groundwater reserves that, if accessed, could fulfill communities’ needs, reduce poverty, and improve people’s welfare (Foster et al. Reference Foster, Tuinhof and Garduño2008). The question, then, for NGOs such as WaterAid, World Vision International (WVI), and Water for People, is how to facilitate access to this water. NGOs have relied upon boreholes as an inexpensive way to access clean, uncontaminated groundwater (MacDonald et al. Reference MacDonald, Calow, Macdonald, George Darling and Dochartaigh2009). Boreholes – small-diameter wells – provide a quick, low-cost means to increase the number of water access points in a region by taking advantage of pre-existing groundwater reserves. New boreholes have several immediate advantages. They create more proximate access to water for populations, which in turn decreases the burden of attaining water by reducing the number of hours spent walking to an access point. Proximity to water can improve both access and individual security as well as help improve health outcomes, especially for children (Carter et al. Reference Carter, Tyrrel and Howsam1999).

While boreholes can bring benefits to the populations they serve, a large literature cites their weaknesses. According to one study of Ghana, ‘many of the boreholes drilled were dry whilst other nominally successful boreholes showed a progressive decline in yield to fail after two to three years of use’ (Cobbing and Davies Reference Cobbing and Davies2004, 111). Cobbing and Davies list a 40% failure rate for boreholes built by various NGOs in the Afram Plains region.Footnote ¹⁴ A study of Mali offers similar pessimism of the effectiveness of boreholes, finding a 41% success rate when success was defined as the boreholes being in use by the community, and a 10% success rate if success was defined as reaching World Health Organization (WHO) minimum acceptable flow rates (Gleitsmann et al. Reference Gleitsmann, Kroma and Steenhuis2007). Gleitsmann, Kroma, and Steenhuis conclude that boreholes are not a sustainable way to improve rural water supply management.

More specifically, several problems with boreholes have been identified that destabilize their ability to produce a durable impact on communities. According to Malians with access to boreholes, the borehole pumps are unreliable and frequently break down, the flow from the pumps is prohibitively slow, access fees to pumps are too high, the boreholes are generally difficult to use, and/or the pumps are located too far from home (Gleitsmann et al. Reference Gleitsmann, Kroma and Steenhuis2007). In addition, as boreholes break down, locals often do not have the knowledge or resources for repairs (Easterly Reference Easterly2014). Boreholes, then, often fall into disrepair. Even when the boreholes do produce sufficient amounts of water, they are not always associated with improvement in clean water at the point-of-use. Gundry et al. (Reference Gundry, Wright, Conroy, Du Preez, Genthe, Moyo, Mutisi, Ndamba and Potgieter2006, 7) evaluate water contamination in South Africa and Zimbabwe, finding that ‘although sources generally deliver “safe” water at the point-of-supply, 12% of samples from such sources were contaminated with E. coli and as such were “unsafe.”’ They confirm other reports that find that the quality of water from improved sources deteriorates significantly after collection, citing studies by Wright et al. (Reference Wright, Gundry and Conroy2004), Trevett et al. (Reference Trevett, Carter and Tyrrel2005), and Clasen and Bastable (Reference Clasen and Bastable2003). Of the households using water from improved sources, 40% of them were using ‘unsafe’ water at point-of-use.

Other studies cite groundwater drought as a reason for borehole failure. Periods of low rainfall, overuse, or other causes of inadequate groundwater replenishment result in boreholes running dry because there is simply not enough water to pump. Importantly, locations that are at greatest risk of groundwater drought are predictable and additional research before borehole drilling could help prevent drilling in locations where groundwater drought is likely (Calow et al. Reference Calow, Robins, MacDonald, MacDonald, Gibbs, Orpen, Mtembezeka, Andrews and Appiah1997). While the hazard for groundwater drought is predictable, NGOs rarely take the steps necessary to investigate the best locations or structure for boreholes for reasons discussed later in this section.

Importantly, while many of these studies focus on particular sites or regions, a WHO document published in 2002 acknowledges that ‘many boreholes worldwide are no longer working’ (Howard et al. Reference Howard, Bogh, Goldstein, Morgan, Pruss, Shaw and Teuton2002, 23). This indicates that the problem is not limited to a few areas that had unfortunate experiences with boreholes but is a broader problem throughout the developing world. Additional studies have looked at specific pieces of the borehole, in particular the pumps used to bring water from the ground to the surface. Arguing that wells or boreholes equipped with handpumps have become the ‘principal technology’ for improving clean water access, Harvey and Reed (Reference Harvey and Reed2004) cite a number of studies that find these handpumps lacking in durability. They point their readers to a Diwi Consult and Bureau d’Ingénierie pour le Développement Rural report which finds that in 1994 40–50% of handpumps in Subsaharan Africa were no longer operational. In addition, they cite data from DWD (2002) and Hazelton (Reference Hazelton2000), which find that less than half of the handpumps in Uganda and South Africa were operational. Writing a decade after these reports were published, Harvey and Reed (Reference Harvey and Reed2004, 6) conclude that ‘Despite these low levels of sustainability, handpumps are likely to remain a major method of delivery of rural water supplies.’

NGOs, while still proponents of boreholes, realize their shortcomings at providing a durable solution to clean water access. As such, NGOs have begun to think about new or more durable solutions to unsafe drinking water. According to Gleitsmann et al. (Reference Gleitsmann, Kroma and Steenhuis2007), interviews with regional directors and field agents of World Vision demonstrated a clear divergence between the official views of the organization and the views of the agents based on their local, hands-on experience. While on an official level, NGOs such as World Vision advocate for boreholes, its field agents recognize the need for alternative water sources designed to better fit local population’s needs (Gleitsmann et al. 2007, 148). NGOs have signaled that for water supplies to be sustainable, local populations must be included, local decisions should reflect community choices, and extensive local training should accompany the creation of water access points (Carter et al. Reference Carter, Tyrrel and Howsam1999; Gleitsmann et al. Reference Gleitsmann, Kroma and Steenhuis2007). Moreover, WaterAid and Water for People advocate research and long-term maintenance plans to improve their water access points. Water for People has data available on their global water-related activities on their website.Footnote ¹⁵ This data includes the location of Water for Aid water projects, as well as the current status of the site (is it operational) and how many people are utilizing the site. While such data is a positive step toward accountability and longer-term sustainability, Water for People, like many other organizations, remains caught in a trap where they focus on immediate policy solutions above all else.

Regardless of the known and documented failures of boreholes using handpumps (failures resulting from the borehole as well as the pump used to draw water), borehole and handpump construction remains common. If this strategy is not durable and NGOs know this, then why do NGOs continue to use boreholes as a way to increase access to clean water? Water NGOs, while recognizing their short-lived success, continue to use boreholes as a primary tool (UNICEF and the World Health Organization 2012). NGOs’ continued construction of boreholes is not caused by ignorance; rather, the focus on boreholes is a result of the reputation trap. Water NGOs, as our model suggests, feel pressure to employ strategies that are attributable to the organization. While research and training, for example, may contribute to more durable solutions to water access problems, the externalities of such strategies are not directly attributable to NGOs. Instead, credit for durable impacts would be shared among NGOs, governments, community leaders, and local groups. This means such programs are less able to send signals to donors that the NGOs are using the donor’s money as effectively as possible. Research and training projects provide less immediate, attributable benefits to the provision of clean water access.

Water NGOs, knowing that donors are concerned with the quality of the NGOs they fund, are aware of the need to pursue attributable policies that they can report to their donors. In interviews with NGO officers in Accra, Agyemang et al. (Reference Agyemang, Awumbila, Unerman and O’Dwyer2009) documented the pressures felt by those carrying out these programs. One officer discussed the tension between producing attributable successes the donor wants to see and pursuing longer-term, more locally appropriate projects:

For water NGOs, this discourages investment in durable options, opting instead to construct boreholes that temporarily improve water access and signal that they are able to produce outcomes desirable to the donors. Agyemang et al. (Reference Agyemang, Awumbila, Unerman and O’Dwyer2009, 20–21) assert that part of this disconnect between donors and NGOs comes from donors’ often limited knowledge about local conditions and how these local conditions will impact the efficacy of the programs. Thus, the desire to signal successes to donors by producing reports that clearly indicate the attributable progress made and the people helped by the NGO encourages programs that are not as effective in the long term as they could be.

While NGOs can, and certainly do, use their knowledge to maximize the efficacy of each borehole dug, energy spent surveying community members about their needs or testing groundwater reserves to identify ideal locations lengthens the process of implementing a borehole, reduces the total number built, and takes multiple funding cycles to demonstrate the long-term payoff, and thus the value, of this approach. Thus, these improvements might make boreholes more durable, but the NGOs’ impact is not as easy to illustrate to donors as total number built. In WVI reports, for example, ‘borehole drilling “success rates” were emphasized. A borehole was judged a success if “wet” at the completion of drilling’ (Cobbing and Davies Reference Cobbing and Davies2004, 117). This very immediate definition of success signals to donors that World Vision is producing attributable outcomes on the ground. It fails, however, to address concerns about durability.

Metrics would have to change and donors would have to become more patient for NGOs to feel comfortable investing in more durable solutions. Agyemang et al. (Reference Agyemang, Awumbila, Unerman and O’Dwyer2009, 20) cite interviews with field officers that express a widespread fear that donor funding could end at any time. This constant concern increases their focus on immediate, attributable results that they can report to donors in order to stay in their donors’ good graces.

Calow et al. (Reference Calow, Robins, MacDonald, MacDonald, Gibbs, Orpen, Mtembezeka, Andrews and Appiah1997) also write that NGOs place little emphasis on borehole alternatives because they encounter difficulties in quantifying the benefits or pinpointing verifiable (attributable) indicators of success with other activities. This makes it more difficult for NGOs to show donors how accountability constraints are trapping them in a cycle of short-term solutions. Moreover, donors have been pushing shorter funding periods and have shown ‘a preference for dealing with immediately tangible problems which produce short-term results (e.g., borehole drilling programmes and the installation of handpumps)’ (Calow et al. Reference Calow, Robins, MacDonald, MacDonald, Gibbs, Orpen, Mtembezeka, Andrews and Appiah1997, 255). Donors such as the Gates Foundation emphasize an ‘outcome investing’ approach to grant making in which donors and NGO’s identify the results to be achieved and the data needed to measure those results.Footnote ¹⁶ These donors are not ignorant, nor are they unaware of the limitations of solutions like borehole drilling. However, they face real concerns about the quality of their investment and wanting to ensure their money is not being wasted or mismanaged. This generates real tension for the donors. Reports and performance reviews ensure progress and allow the donor to see how their money is being spent. These reports, however, inherently generate deadlines for the projects. Thus, the same report that increases donor trust in NGOs can also constrain the projects these NGOs undertake (Agyemang et al. Reference Agyemang, Awumbila, Unerman and O’Dwyer2009, 27).

These pressures will continue to lead organizations like World Vision to signal its quality by advertising that it constructed 809 new wells in 2011Footnote ¹⁷ and celebrating its one-thousandth borehole built in Mali since 2003.Footnote ¹⁸ Such organizations will continue to measure their success in terms of new boreholes dug instead of long-term effects on access.Footnote ¹⁹ Water NGOs find themselves in the reputation trap; they desire to sustainably improve clean water access throughout the world, but the need of donors to see attributable results from NGOs pushes water NGOs to pursue non-durable, but attributable, outcomes.

Avoiding the reputation trap in crisis mediation: evidence from HDC

The HDC is a humanitarian-focused NGO that began its operations in August of 1999. Headquartered in Geneva, Switzerland, HDC works across the globe to achieve the following goals: ‘to develop and strengthen a universal, intercultural and multidisciplinary dialog in which all players concerned by humanitarian issues can exchange their experiences; and to devise and promote sustainable solutions to humanitarian problems’ (Barakat et al. Reference Barakat, Connolly and Large2002, 6). Under the broad goal of finding solutions to humanitarian problems, HDC is involved in international crisis mediation. The organization has also proven susceptible to the reputational dynamics created by the donor–NGO relationship. In particular, HDC intentionally selects the crises in which it gets involved as well as the strategies used to manage those crises, seeking to maximize both its impact and its attributability. HDC demonstrates, however, that not all NGOs fall victim to the reputation trap; while HDC’s selection of Aceh was driven by a need to establish and strengthen its reputation, the organization’s facilitation of two agreements in Aceh proved to be in line with its longer-term goals of conflict resolution.

From its inception, HDC found itself conscious of reputational pressures. Put frankly, HDC needed to establish a reputation that proved its quality to donors in order to secure funding so that it could continue to pursue its humanitarian goals. In 1999, HDC selected its first conflict in which to intervene as a mediator. In line with our model, reputation drove HDC’s decision to mediate the Acehnese conflict in Indonesia. Originally, HDC planned to focus its efforts on the conflict in East Timor, however, ‘the density of aid agencies already present in East Timor following its independence led the HDC to seek a different venue’ (Leary Reference Leary2004, 315). If HDC mediated in East Timor, any successes would not have been attributable to HDC specifically, given the crowd of mediators already present. Moreover, the war in Aceh was a salient and challenging conflict to mediate; if this particular conflict could be successfully mediated, then the reputational results for HDC would be great. HDC, in order to establish its reputation as a quality (and thus funding-worthy) NGO, needed to set its focus on outcomes that would be attributable to the organization and that would capture the attention of donors. Aceh served as a perfect opportunity to build this reputation. As the only mediator present at the time, all mediation successes would thus be attributable to the efforts of the organization.Footnote ²⁰

The Indonesian region of Aceh experienced intermittent conflict since the middle of the twentieth century. Social cleavages led to a major rebellion between 1953 and 1962 known as Darul Islam; the rebellion sought Acehnese regional autonomy over education, religion, and traditional laws. Although the central government granted autonomous status to the region in 1959, autonomy did not become a reality in practice. Thus, in 1976, the Free Aceh Movement (GAM) rose to prominence and declared Acehnese independence (Huber Reference Huber2004). After being brutally repressed by the Indonesian military, GAM fled abroad to regain strength, returning to Indonesia in the late-1980s to re-launch their insurrection. Violence continued throughout the region and intensified in 1998. By 2000, the Acehnese conflict had attracted the attention of HDC (Huber Reference Huber2004).

Because of the complexities of the conflict in Aceh, HDC faced a challenging first-stab at mediation. As aforementioned, however, HDC hoped its solo efforts in Aceh would bring attribution to the organization, establish and strengthen its reputation as a quality NGO, and therefore garner support from donors. Upon entering Aceh in early 2000, HDC was able to achieve two immediate and attributable successes. First, HDC negotiated a ‘humanitarian pause’ in May of 2000 that held sporadically until January of 2001. Then, in December of 2002, HDC facilitated what was considered a major breakthrough for the Acehnese conflict, the Cessation of Hostilities Agreement (COHA) (Huber Reference Huber2004). Both of these outcomes served as immediate signals of success that were attributable to HDC; the humanitarian pause and COHA strengthened the reputation of HDC as a quality NGO able to produce positive policy impacts.

Notably, mediators make decisions about what types of agreements to pursue as well as how to pursue those agreements. These decisions are often constrained by the conflict environment and the interests or priorities of the disputants (much like water NGOs are constrained by local conditions, groundwater availability, etc.). The first agreement HDC negotiated was a ceasefire. Ceasefires are short-term solutions to civil wars that can produce positive impacts by decreasing violence and improving security in the area. They do not, however, resolve underlying grievances or generate long-term protocols for navigating a more complete transition to peace. Ceasefires are known to be relatively short-lived agreements (Gartner and Bercovitch Reference Gartner and Bercovitch2006). The humanitarian pause was no different. While it produced a noticeable decline in violence, it was also plagued by continued clashes between GAM and the government with violence escalating seriously in late August (Aspinall and Crouch Reference Aspinall and Crouch2003).

While ceasefires can be positive progress in civil war resolution, reputational pressures were evident when HDC decided to pursue the ceasefire. HDC intentionally decided to focus on producing a humanitarian pause over other possible types of diplomatic intervention because of their concerns about donor interest and attributability. Citing interviews and personal correspondence with HDC officials, Huber (Reference Huber2004, 41) asserts that two potential strategies for involvement were considered by HDC: strengthening civil society and direct mediation. While possible to pursue both strategies, HDC decided to focus on the humanitarian pause as pursuing both would strain its limited resources. As Huber (Reference Huber2004, 21) notes, ‘This approach was also thought of as “sexier”–more likely to attract media and donor interest if successful.’ The choice to invest in direct talks to generate a humanitarian pause over other strategies of intervention was influenced by concerns about donor perception and HDC’s interest in securing donor attention and funding.

Despite the limited goals of the humanitarian pause in the short-term, HDC did not fall into a reputation trap. While producing this agreement quickly was important to securing continued support and developing HDC’s reputation, the agreement was also a step toward HDC’s long-term goals. The humanitarian pause served as a stepping-stone toward a more comprehensive agreement, the COHA. COHA was hailed as a major breakthrough, incorporating provisions for demilitarization, all-inclusive dialogs regarding autonomy, and provincial elections in Aceh (Huber Reference Huber2004, vii).Footnote ²¹ Although the agreement ultimately failed, it again provided important progress toward durable conflict resolution. Therefore, not only were the two agreements attributable to HDC and a signal of HDC’s ability to achieve successful outcomes, but they were also compatible with the longer-term goals of conflict resolution in Aceh.

Evidence from donor behavior in the HDC case also supports the claim that donors were concerned with the NGO’s reputation. HDC, aware of its need to establish a reputation, selected a case where its actions would be attributable because the conflict was receiving little attention from other mediators. In addition, HDC decided to pursue a ceasefire over other possible intervention strategies because it believed a ceasefire would attract more donor attention. HDC advertised its immediate successes in Aceh to signal to donors that it was indeed a high-quality NGO capable of brokering ceasefires and agreements, even in the very challenging cases. The humanitarian pause, for example, was an initial success because it signaled that HDC had been able to organize face-to-face dialog between belligerent groups and generate cooperation, however fleeting. Donors, viewing the ceasefire as a tangible form of success, credited HDC as a competent mediator that was worthy of continued funding.Footnote ²² COHA also represented a positive and attributable result that bolstered HDC’s reputation as a high-quality mediator. HDC’s funding from donors has risen every year with few exceptions, showing recognition of the NGO’s high quality.

A brief examination of Norway as HDC’s principal donor provides insights into the dynamics of donors’ decision making and their response to attributable outcomes from NGOs. As HDC was a nascent organization when it first started mediating the Acehnese conflict, the organization had to establish a reputation in order to secure continued funding. Norway offered limited funding to HDC beginning in 1999, primarily because of personal rapport between HDC’s director and Norway’s deputy foreign minister. Following the humanitarian pause in 2000, the first success attributable to HDC, Norway began to provide additional funding for the NGO. By 2002, as HDC was on the cusp of their breakthrough with COHA, Norway became the preeminent donor for HDC (Huber Reference Huber2004, 21). When Norway was uncertain about the quality of HDC, the country gave only limited funding because it was cautious to dedicate too much to an unknown organization. As HDC established its reputation as a capable and high-quality NGO through its attributable successes in Aceh, Norway’s hesitance disappeared. This highlights the concern donors have about protecting the quality of their investments and how developing a reputation as a quality NGO can decrease donor concerns and build trust.

The case of HDC’s mediation efforts in Aceh illustrates the pressures created by the donor–NGO relationship. Donors require attributability from NGOs in order to gain knowledge of the NGOs’ type. When uncertain about the quality of the NGO, donors are hesitant and unwilling to fund NGOs. NGOs, knowing this, choose to pursue actions that will be both immediate and attributable in order to signal their type to donors. Along these lines, HDC was strongly influenced by the need to develop a reputation for being a high-quality organization. HDC selected into the Acehnese case specifically because of reputational dynamics, as it knew it had to choose a location in which its actions would be attributable. HDC’s actions in Aceh, however, did not produce a reputation trap. The immediate actions taken by HDC supported the long-term goal of conflict resolution. When juxtaposed to boreholes which are known to have minimal impacts on long-term water access, ceasefires can sow the seeds of peace and are thus compatible with long-term goals shared by both donors and NGOs. HDC, in taking steps toward a lasting peace, established its reputation as a high-quality NGO through its attributable actions in Aceh. The organization used its reputation to gain continued support from donors and to pursue subsequent mediation efforts in additional crises, such as Nepal and Burma (HDC 2012).