Invidious Competition Or Benevolence: Does Not-For-Profit Status Constrain The Behavior Of Credit Unions?

Abstract

If one assumes that individuals who work in nonprofit institutions are no better or worse than others and hence operate in their own interest, an organization can be kept on track and be effective only if the incentives given to individuals in the ordinary performance of their duties reflect the original intent of the organization. Sponsors of not-for-profit institutions must take the time and make an effort to hold administrators to an objective function incorporating such goals.

A model is presented describing two conflicts facing the managers of credit unions. Providing higher rates to large savers could lower cost and expand deposits but does not particularly conform with the democratic intent of credit union founders. Excluding the less creditworthy in favor of higher returns elsewhere will generate more revenue but also seems inconsistent with the original normative goals of credit unions.

A data set for approximately 15,000 credit unions in 1985 is used to measure credit union behavior by size and type. It is argued here that the common bond under which a particular credit union operates acts as a constraint but not a brake on bureaucratic expansionary behavior.