RATIONAL NONPROFIT ENTREPRENEURSHIP

NONPROFIT FIRM

• Public good
• Revenues = Donations
• Charities, medical research, political parties, environmental defense funds.
• Nondistribution constraints (NDC)

US 1990

Why do entrepreneurs found nonprofit enterprises?

Alternative possibilities

• Status, recognition, “warm glow”
• Tax benefits
• Circumventing NDC

THE MODEL

• Commodity bundles: private and public
• No initial institution
• Entrepreneur: nonprofit or proprietary?
• Utility maximization

Entrepreneur's prerogatives

• Contribute before & after everybody else
• Choose how much to produce with available funds & appropriate funds

Agency problem

The entrepreneur gets to consume more public good while contributing less to its provision when the firm is nonprofit.

Why me?

Conclusions

• When the provision of a public good is financed by voluntary contributions, it is in the private interest of an entrepreneur that the firm collecting donations be subject to a nondistribution constraint.
• Prediction: firms receiving donations to provide a single public good will be nonprofit, because of the self-interest of the entrepreneur founding the firm.

Conclusions: Last step

• In the absence of NDC it is privately optimal to appropriate donated money
• Nonprofit firm subject to NDC allows the entrepreneur to commit to not making a negative donation

Conclusions: First step

• Everyone can anticipate that it would be optimal for the entrepreneur to contribute again if donations are too low (so they make smaller donations). Because of this, the entrepreneur needs a mean to commit to not making a positive contribution at the last stage. This can be done by making a sufficiently large initial donation (of time or money).