Yumiao Wang, The [New] Rationale for Nonprofit Organizations

Yumiao Wang, an SJD scholar at the University of Virginia, has an interesting new take on the role of nonprofit organizations and what motivates their existence.  The dominant academic theory of nonprofit organizations is that they respond to four different failures — market failure, government failure, contract failure, or volunteer failure.  These failures, together or separately, lead to an inadequate, inefficient or inequitable distribution of public goods and services.  Nonprofit organizations respond to those failures by adherence to the “nondistribution constraint.” Wang sets forth a new “giving” theory in a paper posted this week.  Here is the abstract:     

The goal of nonprofit organizations is to marshal resources to create an amount of output that is consistent with givers’ subjective preferences. This is different from the goals of both for-profit firms and the government. Nonprofits thus emerge in areas where people will give, rather than in response to market or government failures. This article presents a new theory through which to understand the nature, function, and role of nonprofits – the giving theory – and explains how the nonprofit organizational form helps to fulfill these. The giving theory views the nonprofit, for-profit, and public sectors as partly overlapping. Nonprofit purpose promotion requires giving as an extra resource allocation mechanism in addition to exchange. The nonprofit sector is therefore a “nonprofit economy,” differing from the market economy and command economy.

The nonprofit form – which combines the nondistribution constraint, the purpose fixity requirement, and voluntariness – helps to fulfill nonprofit purposes for three reasons. First, it helps to channel resources to desired people and uses. This is critical because the intended beneficiaries do not have a claim on the organization’s resources, while givers have concerns over who and what with regard to the use of their donations. Second, the nonprofit form, by forgoing equity owners, gives an organization the flexibility to develop a suitable control structure and management for its organizational purpose. Third, the nonprofit form lowers the transaction costs of collecting free resources because the organizational form itself meets most givers’ needs without the requirement of a specific contract.

darryll k. jones