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profit vs. non-profits: responding to hanson

Last week, I responded to Arnold Kling’s skeptical approach to non-profits. The comments were excellent and stressed the wide variety of non-profits. For example, Robin Hanson, in an Overcoming Bias post, asks the following question:

Fabio suggests that the main function of non-profits is as intermediaries between those who want to donate and the deserving recipients they want to help. But the obvious question here is: why can’t non-profits give these deserving recipients vouchers for service at for-profit firms?

Well, the answer is: “it depends.” There are many non-profits that do give vouchers. The one example that comes to mind is philanthropies that give out college scholarships. People are free to take the money to any colleges.

The broader question that Robin raises is why non-profits internalize their work. Why, for example, do non-profits run their own hospitals rather than give out vouchers for healthcare? Hospitals are a great example because they raise a number of issues surrounding non-profits. First, there is ideology. Some groups don’t want you to go to any hospital. Catholic charities may be concerned that their money is going to a hospital that has abortions. Rather than police vouchers use, it may be easier to do the service yourself. It’s about providing the service in an ideological safe zone. Second, hospital services emerged in non-profit forms because of a lack of services from for-profit providers. For example, a lot of hospitals in black urban areas started out as religious groups who were bringing services to places with scant for-profit providers. In the 19th century, the number of black physicians or white physicians willing to work in these areas was small. Third, many non-profits do directly “buy” services. If you have worked in, or studied, a large non-profit, you see that they do directly pay for all kinds of things. For example, non-profits interested in scientific or social scientific research routinely hire consultants to to various studies.

The underlying question is the boundary between organization and market. For regular for-profit firms, we have a Coasian/Williamson answer. Firm boundaries are settled by an internal deliberation focusing on technology, the desirability of having that technology/service inside the org, and market conditions. The deal with non-profits is that they have different considerations – ideology, the utility of the clients other than indicated by their payments, and so forth.

Written by fabiorojas

July 11, 2011 at 2:41 am

6 Responses

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  1. Your examples would seem to explain only a small fraction of non-profits. Surely it isn’t hard to see if a hospital does abortions, and very few hospitals are in places where no other hospitals exist. Yes non-profits do often buy from for-profits, but they often seem to try hard not to when they have a choice.

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    robinhanson

    July 11, 2011 at 2:06 pm

  2. Most nonprofits though aren’t hospitals. Voluntary associations, foundations, and interest groups constitute a significant portion of nonprofits. It’s hard to see why these kinds of organizations would be better off as for-profits. The reason for their existence is to serve some sort of ideological and/or special interest need that isn’t being met by the market. They’re not buyers or suppliers in the same sense that a hospital would be – they’re intermediaries, as Fabio describes, working loosely between the state and market and linking people from communities to these other institutional domains.

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    brayden king

    July 11, 2011 at 2:36 pm

  3. @Robin: How do you know they are a small fraction? Also, regarding hospitals, there’s been a lot of restructuring of the industry, which has left many areas without hospitals, especially low income areas.

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    fabiorojas

    July 11, 2011 at 5:13 pm

  4. @ fabio and robin

    It’s difficult to count the number of nonprofit organizations by type, but there are places to look if you are interested. The National Center for Charitable Statistics (NCCS), in association with the Urban Institute, is one place. Link here: http://nccsdataweb.urban.org/PubApps/profileDrillDown.php?state=US&rpt=PC. These numbers are an underestimation of the sector as a whole since they come from the IRS and not all public charities are required to file with the IRS, based on their yearly revenue or their purpose (e.g. churches). Though, the minimum revenue for filing changed in 2009. For people doing research on the nonprofit sector, the hope is that the counting of nonprofits will become a bit more accurate (though as with any large systems data, there are limitations).

    In my dissertation, I speak of the nonprofit sector as being at the very least two-tiered, though my focus was on the relative power of the nonprofit sector at the national level. Because of this I focused on the sector’s control over resources. Resources are unevenly distributed in the nonprofit sector, in terms of assets, revenues, and expenses. Take one example: 3.7 percent of all public charities account for 82.7 percent of all expenses, while close to 74 percent of all public charities account for only 2.6 percent of expenses.

    There is real diversity within the sector, and as Brayden and Fabio rightly point out, a large majority of nonprofit organizations exist for reasons other than generating revenue. Remember, nonprofits include your local PTA as well as the Sierra Club; the local bowling league exists alongside St. Jude’s, so a one-size fits all approach does not work and cannot work.

    Nonprofits exist for a variety of reasons. Some of them pointed out over the two posts, but that’s really only the tip of the iceberg. But a good starting point, as Brayden notes, is to show how they link individuals to and from the market and the state.

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    Scott Dolan

    July 11, 2011 at 6:19 pm

  5. […] all of the talk and debate about nonprofits, it seems like an opportune time to share a book review I’ve […]

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  6. […] vs. for-profit organization distinction, with some spirited discussion in the comments. Click here, here, and here to read the posts and comments. In addition, orgtheory blogger Brayden King has posted a […]

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