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The International Journal
of Not-for-Profit Law

Volume 9, Issue 1, December 2006

A publication of the International Center for Not-for-Profit Law

Table of Contents

Letter from the Editor

Philanthropy

A New Take on Tithing
Claude Rosenberg and Tim Stone

The Great Divide in American Giving
Arthur C. Brooks

Articles

Salvation in Court: The Salvation Army v. Russia
Douglas Rutzen

Turkish Grand National Assembly Approves New Law on Foundations
TÜSEV

Non-Profit Organizations in South Africa: Reaping the Benefits of the Income Tax Campaign
Tessa Brewis and Ricardo Wyngaard

Civil Society and Electoral Mandate Protection in Southeastern Nigeria
B.U. Nwosu

Velvet Revolution in Iran?
Martin Beck Matuštík

The Russian NGO Law: Potential Conflicts with International, National, and Foreign Legislation
Alison Kamhi

NGOs and Their Role in the Global South
Monsiapile Kajimbwa

Toward an Economic Interpretation of the Nondistribution Constraint
Vladislav Valentinov

Guiding Principles on Non-Governmental Organizations (NGOs)
United States Department of State

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Toward an Economic Interpretation of the Nondistribution Constraint

Vladislav Valentinov1

This article seeks to identify the integrative core of the theoretical understanding of the nonprofit sector. It argues that the nonprofit organization generally represents a response to the difficulties in the adaptation of some economic agents' monetary motivations to others' nonmonetary motivations. From this viewpoint, switching off the profit motive implies the elimination of the intermediating role of monetary motivation and, in turn, the implementation of activities aimed at directly satisfying nonmonetary motivations, through the adoption and advancement of a mission. Theories of the nonprofit sector indicate special cases where monetary and nonmonetary motivations are out of balance; the article proposes an alternative conceptualization of the demand-side and supply-side reasons for the existence of nonprofits.

INTRODUCTION

The economic theory of the nonprofit sector has witnessed significant progress in the last decades. The existence of nonprofit organizations has been attributed to a number of specific market and government failures that create the need for alternative institutional frameworks to perform some socially useful tasks. However, an important challenge faced by the evolving economic theory of this sector lies in taking account of the extraordinary heterogeneity and diversity of organizations in it. So far, different economic theories, such as information asymmetry and the public goods perspectives, have successfully explained parts of the nonprofit sector (Ben-Ner and Gui, 2003), yet they do not identify the integrative conceptual core of a theoretical understanding applicable to the whole sector.

To be sure, the existence of important similarities among nonprofits cannot be denied. A good illustration is provided by the "structural-operational" definition of nonprofit organizations offered by Salamon and Anheier (1992, 1996). According to the definition, nonprofits must be institutionalized to some meaningful extent, as well as be private, non-profit-distributing, self-governing, and voluntary. The last three characteristics are particularly important in capturing the specific nature of the sector. The fact that nonprofits share a number of common institutional characteristics argues in favor of the existence of an integrative conceptual core, and, moreover, suggests that this core should be somehow related to these characteristics.

Therefore, a possible approach to identifying the common core of nonprofit sector theories lies in examining the general significance of the characteristics commonly shared by nonprofits. By “general significance,” I mean that the examination should not be confined to particular classes of situations, whether information asymmetries in markets or supply of public goods, but rather a priori apply to the whole range of nonprofit organizations. The relevant questions here are two. First, why can nonprofit orientation be important for our society in general? Second, how do bottom-up governance and voluntary economic action produce social utility?

This article will contribute to addressing these questions by focusing on one major characteristic of nonprofit organizations – the profit distribution constraint. Specifically, the article will seek to explore the general reasons for switching off the profit motivation, and then analyze how these reasons coincide with existing theories of the nonprofit sector. The objective will be to demonstrate that these theories are essentially variations on one theme, and, moreover, variations that can be systematically organized in a logical framework. Identification of this framework represents a step toward identifying the integrative conceptual core of the sector's theoretical understanding.

I limit my inquiry here to the nonprofit character of nonprofits and disregard their other essential features, such as bottom-up governance and voluntary membership. Analyzing all of the features is crucial to identify the common conceptual core of nonprofit sector theories, even though each feature represents a quite complex object of investigation.

NONPROFIT ORGANIZATION AND ECONOMIC ADAPTATION

This section will discuss why pursuit of profits may fail to satisfy human needs in a market economy. The objective is not to analyze the whole spectrum of negative consequences of profit seeking, but rather to focus on those consequences that can be overcome by creating nonprofit organizations. Specifically, the section will propose an alternative theoretical view of the problem of economic adaptation and will rationalize nonprofit organization as a partial solution to that problem.

Profit as the basis for economic adaptation

It is common knowledge that pursuit of profits has fundamental significance for the operation of markets. The prospect of receiving profits motivates entrepreneurs to produce products and services intended to satisfy human needs. The nature of competition implies that the greater an entrepreneur's ability to satisfy these needs, the greater his profits. It is from this perspective that the existence of nonprofits may look paradoxical in a market economy.

To expand somewhat on the motivational role of profits, let us recall the admiration for markets expressed by Hayek, who viewed the economic problem of society as that of "rapid adaptation to changes in the particular circumstances of time and place" (1945, p. 524). Hayek considered it a "marvel" that "in a case of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be determined by months of investigation, are made to use the material or its products more sparingly, i.e., they move in the right direction" (ibid., p. 527).

Yet, whereas Hayek praised the adaptive capacities of decentralized pricing systems and the ability of prices to codify essential knowledge, this adaptation results from the fact that it brings better economic performance – i.e., higher profits. The role of the price system, according to the Hayekian view, lies in economizing on information costs. This economizing, however, is not an end in itself; it gives entrepreneurs no incentives to work better. The incentives come from profits, not prices. Prices and profits stand here in a dialectical relationship: profits motivate entrepreneurs to effect better adaptation, whereas prices ensure that this adaptation is feasible and efficient.

As suggested by Williamson (1996, p. 101), the view of adaptation as the central economic problem was also shared by Barnard (1938), though he considered internal organization rather than markets to be its major institutional mechanism. The views of Hayek and Barnard are complementary in that the adaptive capacity of markets is realized because entrepreneurs are able to effect internal changes in their organizations. Like Hayekian adaptation in markets, internal adaptation is motivated by the prospects of receiving monetary rewards.

Thus there must exist an important conceptual linkage between pursuit of profits and both types of economic adaptation – through markets and through internal organization. The prospect of monetary gains in the form of profits motivates entrepreneurs to change the structures and activities of their firms whenever new opportunities emerge. This explains why markets are flexible and efficient in satisfying some human needs – and it also, paradoxically, underlies disadvantages of markets in organizing the satisfaction of some other needs.

The profit-based adaptation and the role of nonprofit organization

The problems of profit-based adaptation stem from the fact that the market represents a system of indirect, rather than direct, coordination between consumers and suppliers, in that these two major categories of stakeholders pursue qualitatively different objectives. The former want specific products and services, whereas the latter seek profits and are essentially indifferent toward the nature of products and services they supply. The extent of this indifference of suppliers is directly proportional to the effectiveness of their profit motivation. This is what may be called "objective mismatch" of markets, which presupposes the possibility that greater profits may not always be associated with better satisfaction of human needs. Evidently, this mismatch is also characteristic for the relationship between employees and employers. Insofar as employees are motivated by the prospect of receiving remuneration for their labor from the employer, they can be considered indifferent to the nature of their work. And insofar as they are indifferent, another potential for inconsistencies arises between their motivations and those of their employers. These inconsistencies are basically represented by agency problems, which presuppose that agents pursue their own interests at the expense of principals (see e.g. Jensen and Meckling, 1976).

The commonality shared by both types of "objective mismatches" – between suppliers and consumers on the one hand and employers and employees on the other – can be generalized as the conflict between monetary and nonmonetary motivations, conceptually returning to the distinction between use value and monetary value in classical economic theory. The crucial point here is that monetary motivation is always associated with economic agents' indifference to the products or processes concerned. Even though empirically, the agents may not be fully indifferent to them – i.e., they may also have some nonmonetary motivations – they can be considered indifferent to the extent that they are motivated by the monetary dimension of the products and services.

In contrast, nonmonetary motivation is related to specific types of products and processes, and is lost whenever any of relevant idiosyncratic characteristics are significantly altered. In this sense, nonmonetary motivation presupposes the opposite of indifference in the attitude of economic agents toward products and processes. This view allows us to reformulate the problem of economic adaptation in a way different from that of Hayek: not as adaptation of resource allocation to ever-changing relative prices, but rather as adaptation of the monetary motivations of some economic agents to the nonmonetary ones of other agents. This second type of adaptation, like the first one, presents no serious challenge in the frictionless world of neoclassical economics. The second type of adaptation no longer looks unproblematic, however, if we move from this imaginary world into the real one, characterized by positive transaction costs, opportunism, public goods, externalities, and the non-trivial effect of political and cultural institutions on the organization of economic transactions.

Just as relaxing the assumptions of neoclassical models reveals the importance of institutions in the operation of an economy, the actual difficulties of adapting monetary motivations to nonmonetary ones may be supposed to have led to the emergence of certain institutions intended to overcome those difficulties. Theoretically, these institutions should function to eliminate the intermediating role of monetary motivation, which in some cases provides incorrect incentives, and ensure that all major participants in transactions share the same (or at least mutually consistent) nonmonetary motivations. In the ideal case, these institutions would make suppliers have the same nonmonetary motivations as consumers, and employees have the same nonmonetary motivations as employers (with respect to the nature of the work). This, of course, sounds paradoxical. Is it really possible that entrepreneurs supply a product for its own sake, rather than for the sake of profits? Or that employees perform their duties because they derive positive utility from the process of work, rather than because they expect extrinsic remuneration?

Common sense suggests that these situations, paradoxical as they seem, are nevertheless possible. Behind the somewhat special vocabulary adopted in this description, one can recognize the nonprofit organization. Specifically, the proposed approach suggests that a nonprofit organization, of whatever type, is essentially a response to the difficulties in adapting monetary motivations to nonmonetary ones. A nonprofit attempts to overcome these difficulties by "switching off" the profit motive and replacing it with a "mission," which is invariably formulated in terms of specific outputs and thus represents the object of nonmonetary motivation. The nature of the outputs, whether research or social services or arts, gives a nonprofit its essential identity and legitimacy.

Thus, the role played by mission in a nonprofit organization is to some extent equivalent to the role played by profit in a for-profit firm. But substituting mission for profit raises the difficulty of shifting from the monetary motivation related to a particular product or activity to the pertinent nonmonetary motivation. If suppliers or employees are driven only or principally by monetary motivations, the result is frustration of the nonmonetary motivations of consumers regarding specific products and services and the nonmonetary motivations of employers regarding specific work activities.

Toward an integrative view of nonprofit, for-profit, and cooperative organizations

The distinction between monetary and nonmonetary motivations represents a possible criterion for constructing a continuum of different types of organizations. At the one end of the continuum are for-profit firms, where for both entrepreneurs and employed staff, monetary motivation overshadows nonmonetary motivation. At the other end are mission-oriented nonprofits, whose participants provide their contributions in the form of money and time because they derive positive utility from the process. To be sure, not all for-profit firms lie at one end of the continuum, and not all nonprofit firms lie at the opposite end. That is, nonmonetary motivations are relatively important in some for-profit firms, and monetary motivations – such as motivations of employed staff and motivations of consumers paying for rendered services – are relatively important in some nonprofits. Many firms of both types lie at various points along the continuum.

Near the middle of the continuum is an intermediate type of organization that unites monetary and nonmonetary motivations: cooperatives operating on the principles of mutual self-help. The principal goal of such organizations is for the members themselves to provide specific products or services to fellow members (self-supply). Here, the specific (or even idiosyncratic) nature of these products and services is important, because other products that the cooperative might produce would be useless for at least some members. On the other hand, the outputs generated by cooperatives ordinarily promote some monetary motivations of the members. Hansmann (1980, p. 889) suggests that "cooperatives often appear to be established to limit the price charged to the consumer." Additionally, although cooperatives as legal entities are not themselves entitled to accumulate profits, they may distribute their net earnings to members rather than reinvest them in the operation (ibid).

Even where controlling the prices charged to consumers is not the principal function of a cooperative, the interests pursued by its members are essentially related to improving their economic standing, which corresponds to monetary motivation in the broad understanding of the term, as individual material gain. Hence, those nonprofits that aim primarily to improve the economic standing of their beneficiaries will be located relatively close to cooperatives on the above-mentioned continuum. A graphical representation of the continuum is offered in the Figure 1.

Fig.1. A continuum of organizational forms

In a general sense, both cooperatives and nonprofits reflect stakeholders' reactions to the inability of profit-based economic adaptation to satisfy certain human needs. Both types of organizations seek to eliminate the monetary motivations responsible for the emerging economic or social problems. It is interesting, however, to note the different mechanisms that they use to ensure that suppliers and consumers share the same nonmonetary motivation: cooperatives rely on direct internalization of activities by means of vertical integration, whereas nonprofits do not necessarily make suppliers identical to consumers. While the mechanism adopted by cooperatives appears relatively straightforward (economic agents generate the required outputs for themselves), most nonprofits – those where the bulk of resources do not come from beneficiaries – avoid the "objective mismatch" in a remarkably different way. Managers of nonprofits commit themselves to act in the direct interests of their consumers (beneficiaries) by abandoning the monetary motivation, adopting nonprofit status, and promising adherence to a certain mission.

Evidently, this self-commitment makes sense in some cases but not in others. It is easy to imagine that an organization providing personal services adopts the nonprofit constraint to enhance its trustworthiness in the eyes of actual and potential clients. By contrast, it would be almost absurd to believe that a large agribusiness firm buying produce from farmers would adopt this constraint to assure farmers that it would not abuse its bargaining power and damage the farmers’ economic interests. Instead, farmers create cooperatives to protect themselves from such dangers.

What, then, generally determines whether a cooperative or a nonprofit organization is chosen to protect against opportunism? This is a complex question that merits a separate theoretical investigation. As a preliminary note, the feasibility of these types of organization is determined by characteristics of the respective supply and demand stakeholders. Cooperatives may be expected to dominate when the suffering stakeholders can efficiently engage in collective action and organize an alternative, whereas nonprofits arise when the suffering stakeholders are more diffuse and less able to organize. Additionally, the opportunistic behavior of both supply and demand stakeholders may be discouraged by their adherence to certain social values. The adherence to values may therefore facilitate, depending on the circumstances, their self-commitment in the form of adopting nonprofit status or their internalization of activities through vertical integration.

REVISITING THE THEORIES OF THE NONPROFIT SECTOR

This section will seek to reconcile the proposition advanced here – that the nonprofit organization represents an institutional response to the difficulties in adapting monetary motivations to nonmonetary ones – with the major existing theories of the nonprofit sector. This can be done by showing that these theories represent special cases of the above-mentioned "objective mismatch" in the operation of markets. The proposed approach will also be used to develop an alternative conceptualization of demand-side and supply-side reasons for the existence of nonprofits.

Reasons for discrepancies between monetary and nonmonetary motivation

Although the preceding argument rested on the assumption that the "objective mismatch" between suppliers and consumers, on the one hand, and employers and employees, on the other, complicates and distorts processes of economic adaptation, no specific instances of these distortions have been discussed. This subsection aims to fill in this gap. It also seeks to investigate why the monetary motivation of some stakeholders sometimes fails to harmonize with the nonmonetary motivation of others, thus preventing profit-based adaptation from adequately satisfying human needs. Based on the existing literature, four reasons can be proposed to explain this discrepancy.

One reason why the pursuit of monetary interests may not optimally satisfy nonmonetary ones is the problem of opportunism, which emerges due to asymmetric distribution of information between suppliers and consumers. The concept of opportunism is the basis of the by-now classical "contract failure" theory of nonprofit organizations, developed primarily by Hansmann (1980, 1987; also Easley and O’Hara, 1983), and the "consumer control" theory offered by Ben-Ner (1986). These theories represent two above-discussed views on how opportunism can be combated by abandoning the profit motive: (1) self-commitment on the part of suppliers, in the form of adopting the nondistribution constraint (Hansmann); and 2) internalization of production activities by backward vertical integration by consumers (Ben-Ner). The concept of opportunism, however, also fits well in the proposed framework of (dis)harmony between the two types of motivation: by the opportunistic provision of false information about the attributes of products and services, suppliers are able to gratify their monetary motivations better than if they would provide honest information, and the result fails to gratify the nonmonetary motivations of consumers.

Another reason is that people may benefit from the existence of some products, services, and activities even if they do not pay for them. Essentially, this reason relates to the fact that some goods that satisfy consumers' needs are public or quasi-public rather than private. This reason represents another by-now classical theory of nonprofit organization, this one offered by Weisbrod (1977), who argued that governmental provision of public goods is insufficient because it is oriented to the preferences of the median voter and needs to be supplemented by nonprofit provision. Nonprofit organizations, according to this theory, act as "extra-governmental providers of collective consumption goods" (ibid., p. 30). Public goods theory is also consistent with the proposed framework insofar as suppliers' monetary gratification does not increase alongside consumers' nonmonetary satisfaction when they do not pay for the goods they consume. Nonprofit provision of public goods is evidently based not on internalization of production by consumers, since consumers here are likely to be diffuse and difficult to organize, but rather on suppliers' self-commitment to act in the interests of consumers. This self-commitment presupposes relevant value orientations of entrepreneurs, volunteers, and donors. Social values motivate volunteers and donors to contribute time and money to such nonprofits, whereas these resources could not become available to entrepreneurs through the regular market mechanism. An individual's value orientation depends on the characteristics of his or her personality, as suggested by Young (1986). In a similar vein, James (e.g. 1984, 1986) found that nonprofit firms are often ideological, seeking to pursue abstract ideas rather than to make profits.

Still, social values appear to have a more general significance for the nonprofit organization, since they evidently represent a special class of nonmonetary motivations with no corresponding monetary motivation that could be gratified through the market mechanism. Social values are understood here as enduring beliefs that specific states of existence are socially preferable to opposite or converse states (based on Rokeach, 1973, p. 5). People with these beliefs are motivated to realize them, by moving social reality in the direction of the ideal. A possible mechanism for changing social reality presents itself in the form of supporting a nonprofit organization with the mission to promote the particular values.

The importance of nonprofits in realizing social values is also explained by limitations of both the market and the government sectors. Markets are disadvantaged here because social values – both their specific contents and their degree of acceptance in society – are unrelated to the economic performance of organizations that seek to promote them if performance is determined solely by market forces (see e.g. Sagoff, 1988; Lane, 1991). Unexpected variations in performance consequently represent a risk factor that can be reduced by nonprofits receiving donations. Markets also presuppose specific patterns of managerial behavior that are not necessarily consistent with the pursuit of social values. For their part, governments are bound by strict rules that may increase the costs of activities aimed at realizing social values; in addition, performance of these activities by government requires a broad consensus about their importance in society (Douglas, 1987). Finally, both markets and governments, if entrusted with the performance of social value-related activities, may crowd out private voluntary initiatives (Weiss, 1986; Steinberg, 1993; Frey, 1997).

The fourth reason behind the conflict of monetary and nonmonetary motivations is that people sometimes derive positive utility from activities involving communication and association with one another. These activities are ordinarily organized in the form of clubs, though the clubs may undertake many other activities as well. It is difficult, indeed, to imagine any alternative organizational arrangements for such activities as playing cards or chess, singing, or dancing, if the objective lies in enjoying the process rather than acquiring particular skills. The problem here is similar to that of social values, since the respective nonmonetary motivations do not have monetary counterparts. The importance of associational activities is emphasized by Hansmann (1980) in his treatment of exclusive social clubs. He argues, however, that the for-profit organization of such clubs is theoretically possible but would result in monopolistic exploitation of members by club owners. Members can obviate this danger by organizing the club as a mutual nonprofit, which in this case is functionally equivalent to a cooperative. As Hansmann himself notes, the rationale for the nonprofit organization of exclusive social clubs falls outside his "contract failure" theory and is more characteristic of cooperatives than of nonprofits. However, whereas Hansmann bases his discussion on the example of nonprofit country clubs in the United States, the possibility of monopolistic exploitation seems less relevant for other activities involving interpersonal association, such as singing or playing cards, in which case no realistic market alternatives to the nonprofit organization exist.

Thus, all of the reasons mentioned for discrepancies between monetary and nonmonetary motivations – opportunism, public goods, social values, and direct enjoyment of interpersonal association – represent situations that logically cannot be integrated into the framework of market mechanism, since the monetary motivations are either giving systematically wrong incentives or totally missing. The use of the for-profit organization in these situations can therefore be described as structurally infeasible. This stands in an interesting contrast to the rationale for the cooperative organization, which is based on the partial abandonment of the profit motive. Whereas the cooperative organization can also be rationalized as a response to the imbalance between monetary and nonmonetary motivations, the for-profit organization of activities performed by cooperatives does not appear structurally infeasible. To the contrary, many activities performed by cooperatives, especially those related to purchasing and selling, can be also carried out by individual members for whom the nonprofit constraint is not relevant. Cooperative organization is preferred (when it is) on the basis of its superior cost-economizing characteristics related to the economies of scale and gains of collective action. This cost economizing of course reflects the monetary motivations of cooperative members, so cooperatives have been classified above as "hybrids" between nonprofit and for-profit firms.

Integrating the demand and supply dimensions of the nonprofit organization

The development of the theory of nonprofit organization so far has been generally driven by two distinct questions. (1) Why do people need this organization? (2) Why does somebody agree to contribute resources to found and operate it? (Ben-Ner and Hoomissen, 1993). The theories that provide answers to these questions have been classified, respectively, as demand-side and supply-side. Though analytically insightful, however, this distinction further complicates the formation of an integrative theoretical understanding of the nonprofit sector, as do the internal distinctions within the body of demand-side theories. This section will apply the proposed framework of relationships between monetary and nonmonetary motivations to substantiate the view that the demand-side and supply-side reasons for the existence of the nonprofit organization, like the internally differentiated demand-side reasons, can be arrayed along a continuum.

This continuum can be structured along two major criteria: the extent of inconsistency between relevant monetary and nonmonetary motivations, and the extent to which relevant nonmonetary motivations focus on one's own consumption rather than concern for others. The first criterion underlies the distinction between the two major organizational strategies that can bring the two types of motivation in balance or at least reduce their discrepancy: self-commitment on the part of producers, and internalization of the activity in question in the form of self-supply. These two strategies have obvious differences in transaction costs: the first requires a particular legal status for the organization (non-profit distributing), whereas the second presupposes collective action by demand stakeholders. The first therefore appears a cheaper alternative, preferable in those cases where harmonizing the motivations is sufficient; it is logical to suppose that the second strategy will be used when the first proves too weak.

Indeed, the nondistribution constraint's failure to prevent opportunism in all cases has been recognized and criticized as a limitation of contract failure theory (James, 1983; Ben-Ner, 1986). Moreover, the adoption of this constraint requires from an entrepreneur only a somewhat deeper understanding of the specificity of the market he is in; no altruism or ideological inclination is necessary, though the latter can of course promote the choice of nonprofit organizational form (see, e.g., Rose-Ackerman, 1996). As Glaeser and Shleifer (1998) demonstrate, completely self-interested entrepreneurs can rationally opt for nonprofit status as a means of committing to soft incentives. Obviously, much more is needed to ensure that a certain number of group members can work together for the common benefit.

So, if the self-supply strategy involves higher transaction costs than the self-commitment strategy and is likely to be used only after the self-commitment strategy proves inadequate or too weak, the choice between these strategies can be explained by the extent of inconsistency between relevant monetary and nonmonetary motivations. Small inconsistencies can be compensated by the relatively cheaper and weaker strategy of adopting the nondistribution constraint; for larger inconsistencies, in contrast, the nondistribution constraint will not prevent opportunism, requiring instead the more radical remedy of self-supply. Although this explanation does not suggest what circumstances make this inconsistency strong or weak, it demonstrates that the extent of this inconsistency underlies the incentives to contribute resources to a nonprofit organization.

Specifically, whereas a nonprofit organization requires both demand and supply to exist, the types of nonprofit organizations differ with respect to the relative scarcity of these factors – i.e., with respect to whether demand or supply constitutes the major limitation. The self-commitment strategy can be considered more demand-driven than supply-driven because, given a certain demand for a nonprofit organization, it requires only the minor efforts of supplying it (adoption of the nondistribution constraint). Put differently, the overall scope of a society's self-commitment strategies (e.g., the amount of business transactions performed by trust-based nonprofits) depends principally on consumers' need for trustworthy organizations, rather than on entrepreneurs' readiness to create nonprofit organizations or to convert for-profit operations into nonprofit ones.

The pure self-supply strategy, in contrast, is equally demand- and supply-driven, since the supply and the demand for it come from the same individuals. If those individuals reduce their demand for it, the supply shrinks in tandem; in other words, the individuals supply as much nonprofit organization as they demand, given their system of preferences and constraints. The supply of this type of nonprofit organization (mutual benefit) will therefore always be optimal in the sense of correctly reflecting demand, as long as no legal or other barriers restrain the creation and operation of such organizations.

Thus, the extent of inconsistency between relevant monetary and nonmonetary motivations – the first proposed criterion of structuring the continuum of demand-side and supply-side reasons for nonprofits' existence – encompasses nonprofits whose dependence on supply factors, relative to dependence on demand factors, ranges from low to intermediate (by intermediate, I mean that both factors are equally important). Many organizational varieties of nonprofits are located between the pure models of self-commitment and self-supply. The essential characteristic of such hybrids is partial, rather than full or nonexistent, identity of demand and supply stakeholders.

The limitation of this criterion is that it cannot account for those situations where the supply of nonprofit organization is scarcer than the demand. Therefore, it cannot explain the existence of supply-driven nonprofits. This explanation, however, is made possible by the second criterion – the extent to which the relevant nonmonetary motivations focus on one's own consumption rather than one's concern for others. As noted above, concern for others depends on the extent to which individuals share social values. Social values reflect a commitment to general or abstract views about improving the society, rather than a commitment to consumption. For example, some people prefer to live in a physically healthier society, or a society that better cares for disadvantaged individuals; others prefer a society that is more open and conducive to certain types of art; others want a society that places greater emphasis on religious activities; still others favor a society that promotes particular types of education and research. The key consideration here is that the value-based nonmonetary motivations presuppose a concern for others, regardless of whether this concern rests on true altruism or hidden selfish motives (see e.g. Halfpenny, 1999; Ben-Ner and Putterman, 1998).

As noted above, monetary motivations cannot be harmonized with value-based nonmonetary motivations. This is evidently a strong inconsistency, which precludes a self-commitment strategy based on common monetary motivations. Therefore, only an internalization or self-supply strategy seems possible. In this case, however, self-supply also seems to make no sense, because the suppliers' own consumption is not the motivating factor. Rather, individuals' social value-based nonmonetary preferences leads to the emergence of supply-driven nonprofits, whereby some individuals provide resources that benefit others – i.e., engage in charitable activity by contributing either time or money.

The continuum of hybrid organizational types of nonprofits, between "self-supply" and what may be called "pure supply," reflects a particular distinction among supply-driven nonprofits: the extent to which seemingly altruistic charitable giving still advances the donor's own interests by containing self-serving elements. A donor's interests can be external to the act of supplying – i.e., be motivated by a belief in the moral value of reciprocity, or by private benefits to the donor such as prestige, pride, and attendance at elite parties (Rose-Ackerman, 1996, p. 714). Or the donor's interests may be internal, in the sense of reflecting feelings of commitment and sympathy (ibid.), or psychic income in the form of "warm-glow" effects (Andreoni, 1989). In general, it seems that external interests presuppose a higher proportion of self-serving than internal ones. "Pure supply" nonprofits probably represent an extreme and unrealistic model; at some level, self-interest always plays a role. Nonetheless, charitable nonprofits stand closer to the pure supply model than do other types of nonprofits.

The combination of the two proposed criteria yields a continuum of organizational models, presented in Figure 2. The first criterion – the extent of inconsistency between relevant monetary and nonmonetary motivations – is reflected by the line C1. The line shows greater differences between self-commitment and self-supply models than between self-supply and charity models. As the inconsistencies start to grow, the transition from self-commitment to self-supply may be warranted. The slope of the line, however, becomes insignificant in the interval between self-supply and charity models, which reflects the fact that this criterion cannot adequately explain the existence of nonprofits that are predominantly supply-driven.

By contrast, the line C2, reflecting the other criterion – extent of concern for others – exhibits relatively low values and no significant variation in the interval between self-commitment and self-supply models. The line rises, however, in the interval between self-supply and charity models. So, whereas the second criterion cannot adequately explain the existence of demand-driven nonprofits, it can explain the existence of supply-driven ones. The two criteria are combined in the line C1+C2, which reflects a uniform pattern of the role played by demand and supply factors in organizing nonprofit activities.

Figure 2. Continuum of organizational models of nonprofits based on the criteria of extent of inconsistency between monetary and nonmonetary motivations (C1) and extent of concern for others (C2)

The domination of demand factors in any existing nonprofit should not imply the total absence of supply factors, and vice-versa. The importance of demand considerations (self-serving elements) in supply-driven nonprofits was discussed above. A similar argument applies to the role of supply factors – i.e., social values – in the normal operation of demand-driven nonprofits. Indeed, the organizational strategy of self-commitment is, at least formally, based on the social values of rendering high-quality and honest services to consumers. Social values are even more important for self-supply nonprofits, in which people work together to achieve common goals. Since any form of collective action is potentially vulnerable to free-riding and conflicts of interest, adherence to social values helps reduce these risks. Consider, for example, the explicit reference to social values in the Statement of Cooperative Identity adopted by the International Cooperative Alliance in 1995: "co-operatives are based on the values of self-help, self-responsibility, democracy, equality, equity and solidarity. In the tradition of their founders, co-operative members believe in the ethical values of honesty, openness, social responsibility and caring for others" (International Cooperative Information Center, 1996).

CONCLUSIONS

Why do nonprofit organizations exist in a market economy? The approach suggested here highlights inner controversies in the process of economic adaptation, driven by the pursuit of monetary rewards. Specifically, whereas the operating principle of the market economy can be conceptualized as the constant adaptation of the monetary motivations of some stakeholders (suppliers) to the nonmonetary motivations of others (who exercise demand), the objectives of the interacting agents remain essentially different, which creates the potential for "objective mismatches." The resulting inconsistency between monetary and nonmonetary motivations can be considered a general reason for the nondistribution constraint, since switching off the profit motive implies the elimination of intermediating monetary motivation and the implementation of activities aimed at directly satisfying nonmonetary motivations. Arguably, identifying this general inconsistency constitutes a step toward recognizing the integrative conceptual core of existing theories of the nonprofit sector.

Indeed, the proposed meaning of the nondistribution constraint seems to represent the common ground for existing theoretical interpretations, in that all of these interpretations essentially point out special cases where behavior driven by profit-seeking deviates from behavior that appears optimal from the viewpoint of satisfying particular nonmonetary motivations. Under the principal theories, opportunism caused by information asymmetries can prevent maximization of profits from leading to maximization of useful service to those requiring it (Hansmann, 1980; Ben-Ner, 1986); the presence of public goods has the same effect (Weisbrod, 1977). In addition, monetary motivations seem to be inapplicable where the nonmonetary motivations are either social values or direct enjoyment of interpersonal association. The classification of these situations with respect to two criteria – the extent of inconsistency between relevant monetary and nonmonetary motivations, and the extent to which relevant nonmonetary motivations focus on one's own consumption rather than concern for others – allows the integration of the major demand-side and supply-side reasons for nonprofit organizations, and the development of a continuum of organizational models of nonprofits ranging from demand-driven to supply-driven.

The proposed theoretical interpretation of the nature of the nondistribution constraint has many implications for further research, both empirical and theoretical. A key proposition of the article – that the nonprofit organization represents an institutional response to the difficulties in adapting monetary motivations to nonmonetary ones – is essentially amenable to empirical verification by means of analyzing the motivations of respective stakeholders. Moreover, it may be hypothesized that monetary motivations are more important for demand-driven nonprofits than for supply-driven ones, keeping in mind that demand-driven nonprofits are characterized by less severe inconsistencies between the two types of motivations. Both theoretical and empirical research are necessary to better understand what determines the choice between the two major models of nonprofit organization, self-commitment and self-supply. Moreover, the idea of a balance between monetary and nonmonetary motivations provides a new methodological guideline for further inquiries into demand-side and supply-side rationales for nonprofit organizations, again in both theoretical and empirical respects. Finally, the nonprofit organization is characterized by attributes beyond the nondistribution constraint, such as a bottom-up governance orientation and a voluntary character, as suggested by Salamon and Anheier (1992, 1996); similar integrative approaches might be developed for these factors. Such approaches seem crucial to construct a truly comprehensive theoretical understanding of the nonprofit sector.

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Notes

1 Vladislav Valentinov is a Marie Curie Fellow at the Leibniz Institute of Agricultural Development in Central and Eastern Europe, located in Halle, Germany. This research has been supported by Marie Curie Incoming International Fellowship of the Sixth Framework Program of the European Community (Contract No. MIF1-CT-2005-514036). The views expressed in this publication are those of the author only. The European Commission is not liable for any use that may be made of the information contained in this publication.

 

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