Theories of the Nonprofit Sector
â– Identify the â€œbig questionsâ€ that underlie nonprofit theories
â– Discuss key economic theories of nonprofit organizations including
â€“ market failure, government failure, and government-nonprofit
â– Examine criticisms of economic theories
â– Discuss some non-economic theories with origins in Political Science,
Big Questions Driving MacroLevel Nonprofit Theories
â– Why does the nonprofit sector exist?
â– Why are nonprofits created?
â– Why do nonprofits exist in industries where for-profits and
government also provide services?
Major Groups of Macro-Level
â– Economic theories
â€“ Economic theories of nonprofits emphasize the emergence of
organizations to produce goods and services, where markets
or government fails to meet consumer demand
â– Non-economic theories
â€“ Influenced by a variety of fields including Political Science and
â– Market failures
â– Government failures (public goods theory)
â– Government-nonprofit partnership theory
â– Private, for-profit organizations are the preferred sector for
providing most goods and services in the U.S.
â– However, sometimes markets fail to function as efficiently as
they should. Common market failure problems:
â– information asymmetries
â– inability or unwillingness to provide public needs or
Market Failure Problem
â– What is information asymmetry?
â– When do information asymmetries arise?
â– How can nonprofits correct information
Market Failure Problem: Info Asymmetries
â– What is information asymmetry?
â€“ When one party in a buyer/seller exchange has more information
than the other and has an incentive to hide information
â– When do information asymmetries arise?
â€“ In circumstances that are difficult to understand without technical
knowledge or inside information, or when the consumer has
diminished capacity to judge the quality of a good or service
â– infant or toddler cannot report the quality of care provided at his/her
â– person with a disability cannot accurately assess the quality of care
â– seniors suffering from dementia may not be able to judge quality of nursing
â– How can nonprofits correct information asymmetries?
â€“ Nonprofits are thought to be preferable providers where consumers might not be able
to adequately judge the quality of the service.
Market Failure Problem
Failure to Supply Collective
â– If providing a good or service is not profitable or is inefficient
for private markets to supply, then there is a failure to supply
â€“ Ex: fire protection is a collective good. For-profit firms do not enter
this market because it would be inefficient (unprofitable) for them
to do so.
â– Solutions to collective goods failure
â€“ For government to collect a tax from citizens to pay for this service.
â– In case some not feasible.
â€“ To rely on voluntary action (informal nonprofit organizations) to
supply the needed services through a volunteer fire fighting unit
Government Failure Theory
â– Government is limited in the types and quantities of good and
services it can supply
â– This is partially due to problems inherent in representative
â€“ responsiveness to the â€œmedian voterâ€
â€“ electoral cycles can shift political/government spending priorities
â– Government only produces the types of goods and services for which
a majority of the public is willing to pay taxes.
â€“ Or produces in quantities that are inadequate to satisfy the preferences of certain narrow
â– This means government fails to meet the demands of narrow
constituencies, minority interests, and those with intense preferences
â– Nonprofits form in order to fill these gaps
â€“ Also known as â€œInterdependence theoryâ€
â€“ Governments and nonprofits have weaknesses,
Partnerships can be used as a tool to overcome
â€“ In these partnerships government provides limited
funding for goods and services needed by the public
that the for profit market will not provide
â– Government outsourcing of functions to
nonprofits is viewed as a â€œwin-winâ€ scenario
â€“ Government benefits by expanding social welfare
spending without increasing the size of the
â€“ Government also benefits by capturing creative
programs that are often more effective in treating a
problem but not possible to implement in rule-bound
â€“ Nonprofits benefit from the money â€“ enabled them
to expand the scope and scale of their operations,
and extend their missions to serve more people.
â– Nonprofits are thought to be the more efficient
â€“ They are disciplined by market forces in ways that
government is not
â€“ They are flexible and have the capacity to innovate
â€“ The use of volunteers is â€œvalue addedâ€ labor and
creates social capital within communities
â€“ Through their tax-exempt status they can fund-raise,
bringing their own resources to bear on social
Criticisms of Economic
â– What are some of the key criticisms of economic
Criticisms of Economic Theories,
According to Lohmann
â– Economic theories of nonprofit existence emphasize the emergence of
firms to produce goods and services, where markets or government
fails to meet consumer demand.
â€“ Misclassifies nonprofits as a form of enterprise, because a large
portion of voluntary action does not look or act like productive
â– Economic models emphasize the roles of producer and consumer in a
market transaction or exchange, but for some â€œgoodsâ€ created through
nonprofits the producer/consumer roles cannot be separated.
â€“ Goods and services produced by many NPs cannot purchased in
a market transaction; ends are intangible
â– Economic models suggest nonprofits have no independent basis of
their own for forming. They donâ€™t really explain the basis of rational
choice in voluntary action
â– Uses negative terms, â€œtells us more about what a nonprofit is not than
what a voluntary action isâ€
â– Theory of the Commons
â– Mediating Theory
â– Collective Action Theory
â– Pluralist Theory
Theory of the Commons
â€“ Theory of the commons emerged a direct response to
inadequacy of economic theories in explaining voluntary
â€“ The Theory of the Commons suggests that nonprofits
(whether legally incorporated or not) are formed with
deliberate intent to fulfill artistic, scientific, social,
athletic, or religious purposes within a community space,
â– Affirmative Theory
â€“ It is an affirmative theory of the nonprofit sector,
blending elements of economic theory, political theories
(collective action), and anthropological perspectives.
Theory of the Commons
â– Social action
â– Intrinsic valuation
â– Reliance on ordinary language
â€“ Nonprofits (and other voluntary groups) are viewed as
intermediaries between private citizens and government
â€“ Proponents of this theory argued that citizens have become
alienated from government and public life.
â€“ As a remedy to this alienation, they proposed that smaller, more
personal institutions can help to restore community by serving
as intermediaries between individuals in their private lives and
â– Examples of mediating institutions
â€“ Voluntary associations (including service
Collective Action Theory
â€“ Collective action theory (a.k.a. â€œlogic of collective actionâ€)
suggests that nonprofits arise based on individualsâ€™ demand
for organized action.
â€“ Nonprofits emerge as organizational vehicles for
accomplishing what one person cannot do alone.
â– Expression of group interests
â€“ Nonprofit organizations arise to represent group
interests such as:
â– support for same-sex marriage
â– desire to improve wages and working conditions in a workplace
â– concern for protecting wetlands or conserving wildlife habitats
â€“ Pluralist theory views nonprofits as forming as forming
â– Counteract opposing groups
â– Sustain a democratic polity, prevent against govt
â– Competing Interests
â€“ Pluralists view nonprofits as competing interest groups
vying for political influence, public resources, and
greater expression of their values in the public arena.
â– Fair Distribution of Resources
â€“ Pluralist theory suggests that multiple, competing
groups contribute to a more robust democracy and
ensure a more fair and just distribution of public
â€“ One group may gets it way on one issue, but it cannot
get its way on all issues.
Which Theory Best Explains the
Formation and Existence ofâ€¦..
â– Wounded Warrior Project
â– Habitat for Humanity
â– Greater Chicago Food Depository
â– Illinois Coalition for Immigrant and Refugee Rights (ICIRR)
â– American Red Crossâ€™s Disaster Relief Services
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