The Organization of Social Enterprise

Abstract

Nonprofit theory falls short in accounting for information asymmetries in beneficiaries' abilities and needs. This paper introduces a model in which entrepreneurs receiving donations choose (1) a for-profit or nonprofit form, and (2) giving to beneficiaries (e.g., training programs) or forming social enterprises that transact with them (e.g., work-integration). When abilities significantly vary, entrepreneurs form social enterprises to measure abilities and tailor higher-quality disbursals. High variance leads entrepreneurs to solely transact with beneficiaries, equalizing philanthropic quality across legal forms. For-profit entrepreneurs commit to high-quality through low-scale philanthropy rather than adopting the nonprofit form. Certification verifying such transactions sustains quality even when unobservable, mitigating scaling challenges.

Keywords: organizations, nonprofits, measurement, theory of the firm, corporate social responsibility, social enterprise

JEL Classification: L3, K1, H2