Commercial Activity as Insurance: The Investment Behaviour of Non-Profit Organizations
Brunel University - Economics and Finance; Institute for the Study of Labor (IZA); University of Wales, Swansea - School of Business and Economics; Centre for Economic Policy Research (CEPR)
University of Rome Tor Vergata ; University of Bristol - Leverhulme Centre for Market and Public Organisation (CMPO)
Gabriella Deborah Legrenzi
Keele University - Department of Economics
Annals of Public and Cooperative Economics, Vol. 81, Issue 3, pp. 445-465, September 2010
We provide a new explanation for commercial activities by non-profit organizations whose primary concern is to supply mission output. Starting from the observation that donations to individual non-profits are often highly volatile, we show how investment in commercial activity can constitute a form of insurance for mission activity. Although investment in commercial activity has an opportunity cost in terms of capacity to produce mission output, if donations turn out to be low the commercial revenue will enable cross-subsidization of mission output. The equilibrium commercial investment is (weakly) positively related to the degree of risk aversion.
Number of Pages in PDF File: 21Accepted Paper Series
Date posted: August 17, 2010
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