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The Impact of the Non-Distribution Constraint and its Enforcement on Entrepreneurial Choice, Price, and Quality

CERGE-EI Working Paper No. 299

25 Pages Posted: 19 May 2008 Last revised: 3 Oct 2009

Petra Brhlikova

CERGE-EI, Center For Econ Research & Grad Education, and Econ Institute, Prague

Andreas Ortmann

UNSW Australia Business School, School of Economics

Date Written: July 1, 2008

Abstract

We study the conditions under which it is rational for a representative entrepreneur to start a nonprofit firm. Taking as point of departure a model of entrepreneurial choice proposed by Glaeser and Shleifer (2001), we analyze consequences of weak enforcement of the non-distribution constraint on entrepreneurial choice and price and quality of the product. We find that the nonprofit organizational form becomes unequivocally more attractive to entrepreneurs if enforcement of the non-distribution constraint is weak. We also find that the quality delivered by nonprofit firms is lower under weak enforcement than that of the nonprofit firm under strict enforcement, but higher than the quality delivered by a for-profit firm. We discuss the implications and limitations of our results.

Keywords: Entrepreneurial choice, Nonprofit, For-profit, Non-ditribution constraint, Enforcement on-distribution,

JEL Classification: D2, L2, L31, K42

Suggested Citation

Brhlikova, Petra and Ortmann, Andreas, The Impact of the Non-Distribution Constraint and its Enforcement on Entrepreneurial Choice, Price, and Quality (July 1, 2008). CERGE-EI Working Paper No. 299. Available at SSRN: https://ssrn.com/abstract=1133435 or http://dx.doi.org/10.2139/ssrn.1133435

Petra Brhlikova (Contact Author)

CERGE-EI, Center For Econ Research & Grad Education, and Econ Institute, Prague ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic
420 224 005 227 (Phone)

HOME PAGE: http://www.cerge-ei.cz

Andreas Ortmann

UNSW Australia Business School, School of Economics ( email )

High Street
Sydney, NSW 2052
Australia

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