The Missing Link: Collective-Choice Policymaking in Nonprofit, For-Profit, and Public Child Care Centers

Abstract

"Much of nonprofit research over the past twenty years focuses on how a nonprofit enterprise is different than a for-profit or public enterprise. Influential early theorists relied on the legal constraint nonprofits have in redistributing profit to explain nonprofit production of certain types of goods. Hansmann (1980, 1986) developed Contract Failure Theory to explain consumer demand for nonprofit production of private goods with information asymmetry between buyer and seller. Weisbrod (1977, 1988) developed the theory of Market/Government Failure to explain nonprofit production of collective goods (defined to include goods that have shared benefits). In these foundational theories, the nondistribution constraint is the primary justification for the nonprofit institutional form. In Contract Failure Theory it signals quality to consumers because of the legal constraint nonprofits have in reinvesting all profit back into the enterprise. In Market/Government Failure Theory nonprofits will be formed to produce collective goods to meet under satisfied demand because the nondistribution constraint removes the incentive for the nonprofit to place profit above quality."