Agents Without Principals: the Economic Convergence of the Nonprofit and For-Profit Organizational Forms

81 Pages Posted: 20 Jul 2006

Abstract

Are nonprofit organizations 'different' from firms with owners? The accepted economic account holds that nonprofits are more trustworthy than business firms because nonprofits cannot distribute profits to owners. However, all firms, nonprofit or proprietary, have converged into similar patterns of behavior. Firms, whether nonprofit or proprietary (or even public), are subject to many of the same economic forces, such as resource dependency, institutional isomorphism, and organizational slack. Even in the absence of shareholders somebody still has to run the enterprise: to decide what objectives to pursue, and how; to manage its financial and human resources; and to span the boundaries of the organization in interacting with the key constituencies, other organizations, and the public. While nonprofits have shareholders privileged with rights of accountability, in most of the business sector shareholders have long lost effective control to firm management. In short, management in both sectors has decisional authority, whether de facto, as in the proprietary sector, or de jure, as in the nonprofit sector.

Moreover, the 'nondistribution constraint' cannot guarantee that the nonprofit operates better or worse than a proprietary enterprise in overcoming information asymmetries. The absence of shareholders demanding profits enables the organization to relax into productive inefficiencies, or to cross-subsidize activities the patron would not want to pay for (could she only observe them). Such inefficiencies or cross-subsidization might 'cost' more than the profits the enterprise might otherwise distribute to shareholders if it operated in a proprietary form. Separately, in an industry with more than one nonprofit, the nondistribution constraint cannot help patrons choose between competing nonprofits.

It might be difficult to find enough differences on other grounds to justify continued subsidies based on organizational form. Subsidies might need to be targeted to desired services, provided either in the nonprofit or for-profit sector.

Keywords: non-profit, proprietary

Suggested Citation

Brody, Evelyn, Agents Without Principals: the Economic Convergence of the Nonprofit and For-Profit Organizational Forms. New York Law School Law Review, Vol. 40, No. 3, pp. 547-536, 1996. Available at SSRN: https://ssrn.com/abstract=918230

Evelyn Brody (Contact Author)

Chicago-Kent College of Law ( email )

565 West Adams St.
Chicago, IL 60661
United States
312-906-5276 (Phone)
312-906-5280 (Fax)

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