The nonprofit sector and industry performance

Despite the importance of nonprofit industries in the economy, little analysis has been conducted as to whether the behavior of such industries differs from that of for-profit industries. Extending previous firm-level analyses, we propose a neoclassical theory with an endogenous nonprofit sector. Our analysis implies that nonprofit firms have a competitive advantage over for-profit firms, so that marginal changes in the industry operate through the for-profit sector. As such, marginal industry behavior is identical to that of a for-profit industry and nonprofit regulations may have a limited impact or even no impact on overall industry performance. Our theory has the methodological advantage that standard for-profit analysis applies directly to nonprofit firms, because they can be analyzed as for-profit firms with lower costs. We discuss aspects of the empirical literature that test this theory of nonprofit activity.     

Coordination failure, property rights and non-profit organizations

This paper advances a socio-economic theory of nonprofit organizations aiming at conceiving this organizational form in its complexity and at analysing it from both the viewpoints of its economical and political (democratic) dimensions. This theoretical approach accounts for the existence of nonprofit organizations and the reasons why nonprofit organizations are relatively more efficient when compared with for-profit and government organizations in particular circumstances. The various current explanations of the existence of nonprofit organizations (contract failure, government failure, philanthropic failure) are regrouped around the concept of coordination failure. The paper then examines how nonprofit organizations are able to mitigate these coordination failures. The central thesis is that the specific distribution of property rights characterizing nonprofit organizations results in a particular type of governance structure which allows them to mitigate coordination failures. In turn, the ability of the organization to mitigate coordination failures and therefore its efficiency is conditioned on its democratic functioning.     

Team Incentives and Organizational Form

Conventional wisdom regarding nonprofit firms is that the absence of a profit motive renders them inefficient. However, the costs and product quality realized by profit-taking firms is determined by how well those firms deal with a variety of internal incentive and information problems, and this should be equally true for nonprofits. This article analyzes the team incentive problem in nonprofit organizations. Holmstrom (1982) showed that the introduction of a budget-breaker into a team permitted the creation of incentives to provide efficient effort when it is otherwise impossible. A similar result obtains for a nonprofit team, but the role of principal differs from that found in profit-taking teams. It is shown that any of: donors, government regulators, or Trustees can fulfill this role in a nonprofit team. One implication of this is shown to be that nonprofit firms may indeed pay employees less than otherwise identical employees earn in identical jobs in profit-taking firms.     

Managerial rewards and the behavior of for-profit,governmental, and nonprofit organizations: evidence from the hospital industry

Studies of mixed industries frequently focus on differential behavior between for-profit and either nonprofit or governmental producers. Substantially less is known about differences among governmental, religious nonprofit, and secular nonprofit organizations. We examine the compensation of hospital CEOs to assess the extent to which these three organizational forms pursue similar objectives. Compensation levels, the use of salaries versus bonuses as proxies for weak versus strong incentives, and the criteria organizations use to determine bonuses are analyzed. We conclude that the CEO incentive contracts at religious nonprofit, secular nonprofit, and governmental hospitals imply substantive differences in the behavior of these organizations.     

Managerial compensation and incentives in for-profit and nonprofit hospitals

Differential economic behavior of for-profit and nonprofit institutionscan be manifest in both output and input markets. When behaviorin output markets is difficult to observe, behavior in inputmarkets can be useful proxies. We examine monetary compensationand its composition between base salary and bonus, and the associatedincentive structures, in the U.S. hospital industry. Our datapermit controlling for interinstitutional differences in thescope and complexity of jobs having the same titles, as wellas differences in organization size and other variables. Wefind (1) total monetary compensation for the two top executivejobs is substantially higher in the for-profit sector; and (2)the composition of compensation as between base salary and bonusdiffers materially across forms of organization, bonuses beingabsolutely and relatively greater in the for-profit sector.Particularly noteworthy is the finding that for-profit hospitalsutilize compensation mechanisms that, by involving larger contingentcomponents, provide stronger incentives - greater rewards -as compared with nonprofit hospitals, for performance that ismore easily monitored. While our findings are consistent withmore than one model of comparative organizations differ in theirgoals and, hence, in the kinds of managers they demand and thereward structures they offer. Nonprofit organizations may pursueobjectives that reflect greater concern about collective goodsor other outputs that are more difficult to measure and reward.Alternatively, nonprofits, confronted by a nondistribution constrainton the payout of profit to managers, may lack incentives forefficiency, and so may pursue other goals such as a quiet life.Such differential objective functions, together with the differentialconstraints on the distribution of profit to managers, havetwo kinds of implications. (1) Nonprofit and for-profit organizationsmay attract different kinds of managers, especially at the toplevels, because nonprofits prefer working for a nonprofit organizationand, hence, may offer a lower supply price to them. (2) Thetwo types of organizations can be expected to offer differentialcomposition of compensation as between base salary and performance-basedbonus, providing different incentives for managers. Our analysisis positive in character, the goal being to identify systematicdifferences in organization behavior.     

Nonprofits with distributional objectives: price discrimination and corner solutions

We characterize the patterns of pricing and rationing when paternalistic nonprofit organizations (either private or governmental) care about the level and distribution of consumer surplus provided to their clients. Equilibrium depends upon marginal cost, the organization's distributional weights, exogenous income levels, and cream-skimming by competing for-profit firms. In equilibrium, some consumers pay their reservation price or a lower price above marginal cost, some pay less than marginal cost, some obtain the good for free, and some are not permitted to buy the good at any acceptable price. Comparative statics here differs from that for output or profit maximizers, with discontinuous price schedules shifting abruptly when exogenous income changes.     

Quality, reputation and the choice of organizational form

This paper revisits the hypothesis that nonprofit organizations emerge in markets that are characterized by contractual incompleteness because they ensure consumers against opportunistic behavior. We extend the Glaeser and Shleifer [Glaeser, E., Shleifer, A., 2001. Not-for-profit entrepreneurs. Journal of Public Economics 81, 99–115] framework, which studies an entrepreneur’s optimal choice of organizational form and service quality when quality is non-contractible into a repeated interaction setting. The main result is that when reputations can be sustained, then for-profit status is the preferred organizational form and high quality services are ensured. This finding suggests that existing explanations of nonprofit organizations that focus entirely on contractual imperfections in the producer/consumer relationship may be inadequate.     

Contributions Feminist Economics Can Make to the Quality of Life Movement

This article articulates how and why feminist economists can move the quality of life literature forward and help it become a solid part of the social sciences rather than a subject whose perceived value fluctuates with political winds. Readers are challenged to consider and critique a proposed set of expectations to clearly define the field and set standards of excellence. Examples of this approach are provided from the experiences of an economic research firm striving to build on these guidelines in its work with nonprofit and for-profit organizations that design, fund, evaluate, and/or deliver programs that impact quality of life.     

Coexistence of nonprofit, for-profit and public sector institutions

If nonprofit organizations are superior institutions in resolving informational asymmetry and resulting contract failure, why do nonprofit (NPs), for-profit (FPs) and government/public institutions (GPs) survive in the same industry? This article explicitly models the nonconvex budget set for the consumer that arises through the juxtaposition of the inefficiencies and contract failures that occur in the three sectors. Because the consumer is willing to trade quality for efficiency and price, varying market shares for NPs, FPs and GPs can exist in the same industry. The theory offered complements the functionalist explanation of the existence of nonprofits advanced by Weisbrod and Hansmann using a micro-analysis.     

The private nonprofit provision of education: A theoretical model and application to Japan

Why do some countries provide education and other quasi-public goods through government production while others rely heavily on the private sector?. When private provision is used, why does the nonprofit organization (NPO) often prevail over the for-profit form? Why do nonprofits concentrate on the provision of quasi-public human capital-enhancing goods, such as education and health care? This paper examines these interrelated questions. Section 2 argues that the relative size of the private (nonprofit) sector is determined by excess demand and differentiated demand for quasi-public goods and by the supply of religious entrepreneurship in the society and industry under examination. Section 3 applies this theoretical model to the case of Japan.     

What Economists Do about Values

The paper explores the way the work of classic institutionalist authors can inform modern nonprofit economics. From the Veblenian perspective, nonprofit organization is explained as an institutional consequence of the pecuniary-industrial dichotomy. The Ayresian theoretical system is used to highlight nonprofit organization as a particular form of the progressive weakening of the institution of private property in response to technological imperatives. Based on these arguments, the societal meaning of nonprofit organization is shown to be in realizing instrumental value that is unattainable through pecuniary ceremonial behavior embodied in the for-profit sector. At the same, in line with the Veblenian analysis of American universities, the ability of nonprofit firms to attain instrumental value is recognized as potentially limited by the corrupting effects of the embedding pecuniary culture.     

THE NONPROFIT SECTOR OF THE U.S. ECONOMY: A METHODOLOGICAL STATEMENT

United States input-output accounts identify and measure the interrelationships between the various industries in the United States economy. However, these accounts do not identify nonprofit activities from their for-profit counterparts in the service-producing sector. This paper, prepared by Gabriel Rudney and Paula Young, presents the methodology and summary data produced by disaggregating the service-producing industries to identify separately nonprofit activities.
The input-output accounts for 1977 produced in this study include 107 industries, but in this paper the results are summarized into 14 industries showing only nonprofit and for-profit components. The GNP and total outputs in this study are consistent with the revised input-output accounts for 1977 prepared by the U.S. Department of Commerce, Bureau of Economic Analysis.     

INFORMATION SHARING IN UNION–FIRM RELATIONSHIPS*

Large firms often negotiate wage rates with labor unions. When they do, an ex ante agreement to share information should make it more likely that they will reach an agreement and capture the gains from trade. However, if the firm refuses to share information, the union may shade down its wage demand to increase the probability of acceptance. This reduction in the wage can increase the joint surplus of the agents and increase social welfare. As a result, there are some circumstances in which bargaining with incomplete information can be better for the agents and society than bargaining with complete information.     

Contracts and asymmetric information in the theory of the firm

This paper extends the Coase notation of firms as intermediaries between consumers and input owners to incorporate asymmetric information. We show that in some cases it is optimal for consumers to pay a fixed price for a product and to ignore how the firm operates and the profit that it makes. If firms have private information that consumers cannot cheaply obtain, however, we demonstrate that the optimal contract may require constraints on firms internal operations and profits. Our work provides conditions under which cost-plus contracts are optimal, and demonstrates when nonprofit firms are the preferred organization structure.     

A model of fashions and status

This paper presents a model of fashion cycles based on the idea that individuals purchase fashion goods because their displayed status increases with the personal status of other consumers who buy the same good. Fashion cycles occur in the model because demand now is a rising function of future prices: if future prices are high, only rich consumers will buy it in the future and the good will have a higher status value in the future and will be more desirable now, even though demand now is a decreasing function of current price. The time inconsistency problem is solved by repeated cycles which allows for reputation building. The crucial assumption made is that there is perfect information about the price path of all firms and the average status of the purchasers of each product. This limits possible profits in fashion markets in competition as imitation of price paths is then possible.     

Does organizational ownership matter? Objectives of employees in public,nonprofit and for-profit nursing homes

Does organizational ownership matter for employees? We conducted a discrete choice experiment to reveal employees’ objectives in for-profit, nonprofit and governmental nursing homes. The results indicate that differences in objectives among nursing home staff are at least partially related to differences in ownership type. More specifically, we find that employees of public nursing homes are less extrinsically motivated than their for-profit and nonprofit counterparts. However, the results also show that employees of for-profit, nonprofit and governmental nursing homes are trading off output quality and output quantity differently, in line with the view that public providers of elderly care are pursuing a supplier-of-last-resort objective function.     

The economics of university-industry research linkages

Cooperative research can involve various combinations of government, industry, and the university. This article focuses on university-industry cooperative research interactions or linkages. Such linkages involve a network of money, information, and human effort flows between the science and engineering sector of the university and its counterpart in business firms. The university is modeled as a multiproduct-multisector nonprofit organization where the linkages are produced by research faculty. A dynamic control theory approach is used to shed light on the economic decisions of the university relating to the hiring of faculty and the production of products. One likely result of such decisions is the fallover time of undergraduate output and the rise of research output. Since research output is an element in overall technological change, the internal management of the university has public policy implications. Other policy values of the analysis are also indicated.     

Stagflation as an Institutional Problem

The existence of nonprofit firms has been traditionally explained by two types of theories emphasizing the market failures that these firms address and the individual motivations to found these firms. To date, these theorizing strands have been mainly disconnected from each other. To fill this gap, this paper develops an integrative theoretical understanding of nonprofit organization by demonstrating the way market failures addressed by nonprofit firms are interrelated with the motivations of nonprofit entrepreneurs. Building on the arguments of Thorstein Veblen and the theory of the division of labor, it is argued that nonprofit organization embodies partial collective self-sufficiency necessitated by the limitations of the ability of market exchange to satisfy human needs.     

Retailing public goods: The economics of corporate social responsibility

This paper explores the feasibility and desirability of Corporate Social Responsibility (CSR). We identify CSR with creation of public goods or curtailment of public bads. Using a model with profit-maximizing firms, the paper shows that there is a direct parallel between CSR and traditional models of private provision of public goods. Indeed, firms that use CSR will produce public goods at exactly the same level as predicted by the standard voluntary contribution equilibrium for public goods. We compare CSR with government provision and charitable provision, discussing when CSR by private for-profit firms could have a comparative advantage in dealing with public goods provision.     

Lessons from Environmental Regulation for the Nonprofit Sector

As the third sector's economic and social impact grows worldwide, efforts by governments to regulate the sector have focused on increasing compliance in tax–exempt organizations. This article turns to the environmental sector for guidance, summarizing key characteristics of environmental regulation and noting what strategies are likely to prove useful for application to regulation of nonprofit organizations. The article finds some value in promotion of market–based enforcement schemes, but little value in promulgation of laws specifying governance structures and performance standards by a central authority. The most promising opportunity for improvement of the nonprofit regulatory process involves incorporation of financial incentives into monitoring schemes.