The Nonprofit Sector and Industry Performance

Darius Noshir Lakdawalla, RAND
Tomas Philipson, University of Chicago

Abstract

Given the importance of nonprofit industries in the economy, little analysis has been conducted as to whether the behavior of such industries differs from that of for profit industries. Extending previous firm-level analyses, we propose a neoclassical theory with an endogenous nonprofit sector. Our analysis implies that nonprofit firms have a competitive advantage over for-profit firms, so that marginal changes in the industry operate through the for-profit sector. As such, marginal industry behavior is identical to that of a for-profit industry, and nonprofit regulations may have a limited impact or even no impact on overall industry performance. Our theory has the methodological advantage that standard for-profit analysis applies directly to nonprofit firms, because they can be analyzed as for-profit firms with lower costs. We discuss aspects of the empirical literature that test this theory of nonprofit activity.