future of non profit sector

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Association for Public Policy Analysis and Management

The Future of the Nonprofit Sector: Its Entwining with Private Enterprise and GovernmentAuthor(s): Burton A. WeisbrodReviewed work(s):Source: Journal of Policy Analysis and Management, Vol. 16, No. 4 (Autumn, 1997), pp. 541-555Published by: John Wiley & Sons on behalf of Association for Public Policy Analysis and ManagementStable URL: http://www.jstor.org/stable/3325926 .

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TheFuture f theNonprofitector:ItsEntwiningwith BurtonA. WeisbrodPrivateEnterpriseand GovernmentAbstractThenonprofit ector-neither privateenterprisenorgovernmental-is growingrapidly,and not only in the UnitedStates. This articleexploresthreequestionsabout the sector, which includes large elements of such service industriesas universities,hospitals, nursing homes, day-carecenters, museums, socialservices,andorganizationspromotingmedicalresearch, nvironmentalprotec-tion,and the arts. Thesequestionsare:(a) Why s thenonprofit ectorexpandingworldwide?; (b) How is the growth of nonprofits affectingotherparts of theeconomy?;and (c) Whatevidence is therethat nonprofitsmake a difference,that they perform functions which private firms or governmentcannot per-form?A majortheme is that the sector'sgrowthnecessitatesfinding ways toincreaserevenues,and that has broughtside effects,particularlyas nonprofitshave become more and more "commercial." n the process, bordersbetweenthe nonprofit and both the for-profitand public sectors are being crossedincreasingly,and with consequencesthat often pose problems.

INTRODUCTIONNonprofits are increasingly around us-providing day care for our children,medical care for our sick, and nursing home care for our elderly; operatingmuseums; assisting the poor; supporting basic medical research; and far more.Yet they are largely overlooked, except when they are pleading for funds orsomeone is complaining about their competition with private firms or govern-ments are trying to tax them.Only rarely does anyone ask the fundamental questions: Does society neednonprofits? If so, in what parts of the economic system are they most useful?In what ways are they better than private firms and government?Before I analyze the nonprofit sector's special role, it will be useful to high-light its size and growth in various countries. In health care, in 1990, 67 percentof all patient days of hospitalization in the United States were provided bynonprofit hospitals. In education, nonprofits enrolled 11 percent of all primaryJournal of Policy Analysis and Management, Vol. 16, No. 4, 541-555 (1997)? 1997 by the Association for Public Policy Analysis and ManagementPublished by John Wiley & Sons, Inc. CCC 0276-8739/97/040541-15


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542 / The Futureof theNonprofitSector

and secondary school students in the United States and 22 percent in theUnited Kingdom. In the child day-care industry, nonprofits cared for over 35percent of the children in France, Germany, and Japan; 56 percent in the UnitedStates; and 82 percent in the United Kingdom [Hansmann, 1995; Salamon andAnheier, 1995]. In the service sector as a whole, where most nonprofits operate,they account for 9 to 10 percent of total employment in Japan, the UnitedKingdom, France, and Germany and more than 15 percent of total employmentin the United States [Salamon and Anheier, 1994, p. 33]. In Israel nonprofitorganizations employ over 13 percent of the entire Israeli labor force [IsraelFinance Ministry, 1996].Another measure of the importance of nonprofits is their use of volunteerlabor. In the United States, the 89 million volunteers in 1993 donated theequivalent of 11 million full-time workers' time-more than 9 percent of theentire paid labor force [Hodgkinson and Weitzman, 1994, p. 23; U.S. Councilof Economic Advisers, 1995]. In Israel, the amount of labor volunteered tononprofits is less dramatic, but still sizable; in 1991 it was the full-time equiva-lent of 7 percent of the paid labor in the nonprofit sector but only 1 percentof the entire Israeli labor force [Israel Finance Ministry, 1996].What is really dramatic is the rapid growth of the nonprofit sector. In theUnited States, the last 30 years have seen a tripling of the number of nonprofits,from 309,000 in 1967 to nearly 1 million today. Their total revenues, less than6 percent of GNP in 1975, exceeded 10 percent in 1990 [Herman, 1995]. Inthe decade from 1980 to 1990, nonprofits' paid employment grew by 41 percentin the United States and 36 percent in Germany-more than double the overallgrowth of national employment [Salamon and Anheier, 1995].I pose three questions about the nonprofit sector: (a) Why are they expandingworldwide?; (b) How is the growth affecting other parts of the economy?; and(c) What evidence is there that nonprofits make a difference, that they performfunctions which private firms or government cannot perform?

WHYISTHENONPROFITECTOR ROWING?Why is the nonprofit sector growing? The answer, I believe, is this: Nonprofitsperform the kinds of functions typically identified with government-helpingthe disadvantaged, providing social services, supporting collective services suchas museums and schools, preserving the environment, funding medical re-search, and the like. When government provides these services in forms andamounts that voters want, there will be little role for nonprofits. However,when populations are very diverse, services that satisfy the majority may leavemany people severely undersatisfied; nonprofits are thus understandable as analternative mechanism for providing collective services. The more homoge-neous a society is-the more similar are its citizens' preferences-the smallerthe need for nonprofit organizations. In countries with relatively homogeneouspopulations, such as in Scandinavia, government can meet the wants of itscitizens for the various collective services, and so we find that governments arein fact considerably larger in those countries, whereas the nonprofit sectorsare relatively unimportant. This helps to explain two phenomena that havebeen widely observed: first, the far greater importance of the nonprofit sectorin the United States than in other countries; and second, the growing impor-tance of nonprofits everywhere, as population migration and the flow of infor-


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mation through television and computers have the effect of magnifying diver-sity in country after country [Weisbrod, 1975].This growing diversityof societies is bringing, everywhere,retrenchment ofgovernment and increased reliance on the nonprofit sector. Nonprofits, how-ever, face an enormous obstacle: They lack government's power to tax, andso when they are confronted by increased demands, they do not have thecommensurate resources to meet those demands. The result is that nonprofitssearch for new sources of revenue, and this brings them into increasinglycomplex relationshipswith the rest of the economy. Theyhavebeen successful,overall, in finding ways to increase revenues, but that success has brought sideeffects, for nonprofits have become more and more "commercial."WHAT RETHEEFFECTSFNONPROFITECTORROWTH-ONPRIVATEIRMS,GOVERNMENT,ONSUMERS,NDON NONPROFITSHEMSELVES?As nonprofit organizations struggle to offset declining governmental support,they reach out for new markets, trying to find things they can sell profitably.The result is that nonprofitshave thrustthemselves into new arenas,generatingincreased competition and growing political attention. Tension has escalatedbetween nonprofits and both private firms and governments, as competitionbetween nonprofits and these other sectors has increased.At the same time, therehas also been growing cooperationbetween nonprofitsand these other organizations. Therehas been scarcely any public recognitionof the alliances between nonprofitsand privateenterprises, and between non-profits and government,but these are generatingbehavior that is no less trou-bling than nonprofits'aggressive competitivebehavior. Whatever the specificform of entanglement between nonprofits and the rest of the economy, prob-lems and stresses emerge. Whenevernonprofits enter new markets, there areconsequences.What are those consequences-for private enterprise, for government, andfor the nonprofit sector itself? Both the nonprofitactivities that competewiththe private and public sectors, and those that involve cooperationwith them,pose problems.Effectson the PrivateSectorCompetitionand TensionwithPrivateEnterpriseThe more the nonprofit organizations expand, the more they encounter resis-tance-for example, charges that they are guilty of "unfaircompetition"withprivateenterprisebecause they receivesubsidies [Emshwiller, 1995;U.S. SmallBusiness Administration,1983].What is clear is that nonprofitsare competingincreasingly with for-profitfirms, and in an amazing variety of forms. Hereare some examples:* The nonprofit Metropolitan Museum of Art operates 16 museum shopsin the United States and 21 abroad, in addition to its catalog of items forsale [Cronin, 1995].* The nonprofit Duke University Medical Center is establishing a businessunit to "compete with private-sector companies that run trials for drugand medical-device companies" [Winslow, 1995, p. B6].


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* Nonprofitfood banks establishedto feed the poor arebuilding food-dehy-dratingplants that compete with privatefirms [Lewin, 1994].* Nonprofitchurchesarerunningtours in competitionwith for-profit ravelagencies [Brannigan,1995].* Nonprofitzoos aredevelopingcreativewaysto attractsupportfrompayingtourists;for example, one zoo constructed a high wire for orangutanstoshow off their ability to climb and swing [Molotsky, 1995].The competition between nonprofitsand private firms is made even morecomplex bythe fact that, at the same time nonprofitsaremovinginto activitiesthat have previously been the domain of for-profitfirms, private firms areexpandinginto traditionallynonprofitareas. Thus, privatehealth clubs have

entered an industry long the preserve of the nonprofitYMCAsand YWCAsin the United States, and for-profitamusement parks "are encroaching on[nonprofit]museum turfby addingeducationalaspects to their entertainmentproducts" Becker,1995,p. 7]. There s verylittleunderstandingof the dynamicforces causing the expansion of each sector into areas long dominatedby theother, and equallylittle understandingof the effects.Cooperotionwith PrivoteEnterpriseThe"growingcommercialism"of nonprofits s also occurringthrough coopera-tive mechanisms in which nonprofitsand private firmsjoin forces. Between1980 and 1981 and 1987 and 1988, for example, privateindustry support foruniversity research more than doubled in real terms in France, Japan, theUnitedKingdom,and the United States, and it more than tripledin Germany[Webster, 1994]. Virtually every major U.S. university has joined forces insome manner with large multinational firms, especially pharmaceuticalandchemicalfirms[Blumenthalet al., 1996].Forinstance, HarvardUniversityhascontracted with the German chemical company, Hoechst A.G.;WashingtonUniversitywith Monsanto ChemicalCompany;and NorthwesternUniversitywith Dow Chemical.Scientific research is not the only area in which nonprofituniversities arebecoming allied with private firms. Athletics is another. The University ofMichiganrecentlyreacheda multimilliondollaragreementto advertiseathleticshoes for Nike;in a masterfulobfuscation,Nikeagreedto "help"he universitydesignits uniforms!Evencharities areengagingin suchalliances:The MarchofDimes(MOD)recentlyteamedupwithKellogg's, he manufacturerof breakfastcereals;the MODreceived$100,000in returnforwhat amounts to an endorse-ment of Kellogg'sProduct 19-a cereal that contains folic acid, which helpspreventbirth defects of the spine and brain. This is no isolated example;thenonprofit MOD even has a senior staff member with the title, Director ofStrategicAlliances,National Promotions, to develop such money-generatingarrangements[Mclver, 1995].Why are nonprofitsengaging in such symbiotic relationships with privatefirms?Because therearepotentiallymassivefinancialbenefitsfromcollabora-tion-benefits that are not occasional and random,but are systematic conse-quences of powerful economic forces. Universitiesand other nonprofitssuchas hospitals, museums, and charities receive many subsidies, and if the non-profitsareclever,they can convertthose benefitsinto somethingthat is salableto private firms. It is increasingly difficult to evaluate the social contribution of


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nonprofitsin the modem world where barriersbetweennonprofitand for-profitfirmsarecrumbling.The increased fuzziness of the boundarybetween nonprofitand for-profit organizations is not accidental;there are forces breakingdownthese borders. Wise public policy must recognize them.Nonprofits'drive for revenue and privatefirms'drivefor profit present greatopportunities for both to gain from collaboration. But whether nonprofits arecollaborating with private firms or competing with them, there is a criticalquestion: Arenonprofits acting more and more likeprivate firms, and by doingso, forfeiting heirclaimof specialstatusandprivilege? will return to this theme.Now I turn from the ways that growth of the nonprofit sector is affectingprivate firms to its effects on government.Effectson GovernmentCompetitionand TensionwithGovernmentWhen nonprofits expand, government loses revenue. In the United States, theloss is particularlyimportant for local governments. Propertytaxation is theirmajor source of revenue, and everyparcel of land that moves out of the taxed,private enterprise sector and into the untaxed, nonprofit sector means moreloss of tax revenue. At a time when governments are searching desperatelyfornew sources of revenueto dealwith the growingproblemsof crime andpovertyand the loss of revenues from the federal government, the expansion of non-profits is a serious fiscal threat. The most recent report by the U.S. TreasuryDepartment noted that 10 percent of all property in the country was held bytax-exempt nonprofits in 1977 [Arenson, 1995c]; the figure is surely highertoday. Indeed, as of 1993, the city of Buffalo, New York,found that 34 percentof its real estate was tax exempt, and for Syracuse,New York,it was 59 percent[Glaberson, 1996].Local governmentsare respondingto this erosion of their tax base. They aredeveloping innovative ways to circumvent state laws that grant exemptionsfrom local government taxation, in order to collect revenue from nonprofitorganizations. For example, cities are withholding zoning approvaland build-ing permits for new buildings unless the nonprofit university, hospital, orsymphony orchestra agrees to pay a "voluntary" ax. Tension between non-profitsand governments is becoming so intense that lawmakers are searchingfor reasons to withdrawtax-exemptstatus altogether.Thetension has escalatedas evidence has surfaced that nonprofit executives were receiving levels ofpay that were unseemly for charitable organizations. When most Americanslearned of compensation of over $500,000 per year for nonprofitorganizationexecutives such as the president of United Wayof America,WilliamAramony,the chief executive of the PTL Ministry, the Reverend Jim Bakker, and thepresident of Adelphi University,PeterDiamondopoulos [Hancock, 1996], theywere shocked. Both Aramonyand Bakker went to prison, but in the processthe public faith in nonprofits has been shaken [Arenson, 1995b; Gaul andBorowski, 1993]. Nonprofitsare increasingly being seen not as public-spiritedphilanthropiesbut as self-servingentities that pursue the interestsof their topofficials and boardmembers.Another form of tension between nonprofits and government involves theapplication of antitrust laws to nonprofits whose activities have traditionallybeen regardedas benevolent. In 1991 the U.S. Departmentof Justice brought


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an antitrust action against a group of nonprofit universities for price-fixing intheir granting of financial aid to prospective students. One of the schoolsrefused to abandon the practice, contending that the price-fixing-which itadmitted-actually promoted social welfare because it increased overall oppor-tunities for low-income students ["M.I.T. Wins a New Trial in Price-FixingCase," 1993]. In effect, the university was saying that its collusion with otherschools was socially valuable, whereas collusion in the private enterprise sectorwas not. The Justice Department disagreed. Neither side, however, could callupon a solid research base to buttress its case. Nonprofit hospitals, too, havefallen victim to antitrust laws, as proposed mergers have been held to beanticompetitive. Again, public policy hangs on matters about which little isknown-whether nonprofit and for-profit organizations use monopoly powerin materially different ways. Although little is known, one recent study indicatesthat nonprofit hospitals that gain greater market power are likely to reduceprices, while for-profits are more likely to raise them [Lynk, 1995].CooperotionwithGovernmentNonprofits' search for revenue does not always hurt government. Sometimesgovernments benefit. For example, nonprofits in the United States have discov-ered money-making opportunities in working with state governments to marketautomobile license plates. Thirty-six states now permit some nonprofits tobenefit from specialty license plates that advertise arts organizations, universi-ties, environmental groups, and garden clubs. The University of California,Los Angeles (UCLA),is collaborating with the state of California to sell a licenseplate that finances student scholarships [Herman, 1995]. Such cases of whatamount to joint ventures between nonprofits and governments appear to berare, but fiscal pressures on both types of organizations are bound to generatemore such novel alliances in the future.Effectson ConsumersChange within the nonprofit sector is taking many forms. Among hospitals inthe United States, where nonprofits dominate the industry, pressures to reducecosts are leading to mergers and closings that are increasing hospitals' marketpower-as noted earlier. But there has been little research on the effectivenessof competition in industries with a large nonprofit sector. How are consumersaffected when nonprofits dominate an industry? Just a few years ago, hospitalexecutives in five states of the United States were doing what was previously"unthinkable, and possibly illegal"-talking to one another about cooperationand joint ventures that would earlier have violated antitrust laws [Felsenthal,1993]. Two years later the U.S. Justice Department shifted its position andinstituted antitrust suits against four hospitals and physician groups for cooper-ating too much, contending that they formed monopolistic alliances to main-tain high prices, to the detriment of consumers [Simpson, 1995]. Is publicpolicy right now in discouraging nonprofits' expansion? Or was it right earlierin encouraging it? We simply do not know.Effects on NonprofitsTension is growing inside the nonprofit sector, too. As nonprofits becomeincreasingly commercial in their activities, they are doing things not custom-


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arilyidentifiedwith the genteel approachesof benevolent organizations. Chari-ties are bringing lawsuits for breach of contract against people who pledgedonations but do not fulfill them [Schmitt, 1995], and universities are sendingrecruiters (some might term them "salespeople")around the world in searchof tuition-paying students [Hancock and Roberts, 1994].Nonprofit organizationsare also developingfor-profitsubsidiaries. AtNorth-western University,for example, its Institute for LearningSciences has starteda for-profit firm to market a customized computer program that allows theuser to hold conversations with experts in a field, and the director of theInstitute is also the acting president of the new corporation [PARKprogress,1995]. There is absolutely nothing illegal about such arrangements, but theydo blur the distinctions between nonprofits and private firms, and they needto be assessed [Kramer, 1995;Young, 1994].In the case of university-industry cooperation in research, the key questionis whether these financial arrangements change the direction of universityresearch and researchers' interpretation of findings. A new study of nearly200 companies engaged in collaborative research with universities disclosednumerous agreements to keep research results secret, even beyond the timerequiredto file for a patent [Blumenthalet al., 1996].Wasthe InternalRevenueService in the United States justified in claiming that in some partnershiparrangementsthe nonprofit partnerwas sacrificingthe interests of charityandhence violatingthe tax code requirementthat it be "operatedexclusivelyfor .charitablepurposes"[Simon, 1987, p. 93]? The issues are subtle and complex.WHYDO INTERACTIONSCCUR CROSSECTORS,NDARETHEYNCREASING?I predict that the increased fiscal pressure on nonprofits will lead them togenerate new, more creative forms of commercial activities, and that thesenew forms will further blur the distinctions between nonprofit organizationsand private firms. In the process I expect reconsideration of many existingpublic policies regarding nonprofits: their subsidization and restrictions ontheir freedom to lobby government; to engage in joint ventures with privatefirms;and to compete with privatefirms. I also expect increased pressure fromgovernmentto requirenonprofitsto disclose more publiclytheir compensationof executives, and I anticipate the applicabilityof antitrust laws to nonprofitsto emerge as a political issue.There is a potent force behind these forecasts. This force was not unleashedearlier because of the availability of government support. With that supportwithering, however, nonprofits face the choice of either reducing their activi-ties, at the very time that social need is growing because of government re-trenchment, or finding ways to increase revenues from nongovernmentalsources. If they choose the latter, which most are doing, they can pursue twoavenues-try to increase private donations or find ways to generate moreincome through the sale of goods or services-that is, commercial activity.Increasing donations is generally not promising. Although some new andimaginative forms of appeals for donations are being developed-a recentadvertisementby a charitablenonprofitsaid, "Donateyour car, truck,motorcy-cle, boat (any condition),"emphasizing that it was tax deductible [JUFNews,1995]-there is little reason to expect that donations can be significantly in-creased unless tax laws are changed substantially.Such changes, however, are


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being discussed-particularly the granting of tax credits to encourage charita-ble donations.New commercial activities are the major path open to nonprofits to generateadditional revenue. And once nonprofits enter the realm of finding salableoutputs, they are in the domain of private enterprise, for selling goods andservices is the preeminent source of private sector revenue. Nonprofits thatpursue revenue in the same ways that private firms do are likely to emulatethose firms, and by becoming more like them, they undermine the fundamentaljustification for the special social and economic role they have played. Why,it is increasingly being asked, should society give subsidies and tax exemptionsto nonprofit organizations that are less and less distinguishable from privatefirms?The key to understanding the interrelatedness of nonprofits with other partsof the economic system is to recognize that nonprofits operate according torules and constraints that differ from those on government and private enter-prise. This underscores a fundamental economic proposition: Whenever"rules"-for example, regulations, taxes, or prices-differ among sectors of aneconomic system, organizations can gain from exchanges between sectors. Non-profit and for-profit organizations face differential restrictions on whether theirincome is taxed, differential availability of resources such as volunteer labor,differential restrictions on their freedom to lobby legislators [Arenson, 1995a],and differential access to private and public subsidies.The "gains from exchange" between taxed (for-profit) and "untaxed" (non-profit) organizations apparently benefit the organizations involved, but theydo not necessarily benefit society. The managerial "creativity"can be brilliantbut socially inefficient. Consider the following illustration.In 1983, the president of Bennington College, a small college in Vermont,made a discovery: Because Bennington was a nonprofit organization that paidno corporate profits taxes, it did not benefit from being allowed to chargedepreciation as a cost of production; private firms, by contrast, did benefit,because depreciation reduced their tax liabilities. Eureka! The college hadfound an opportunity to gain from exchange between sectors that differed intheir tax rules. Soon Bennington agreed to sell all its buildings to an alumni

group, for $3 million to $8 million annually, and lease them back for 99 years."In effect, the college would get an interest-free loan and the alumni wouldreap tax benefits" [Biddle and Slade, 1983, p. 9]. Both the college and thereal estate purchaser benefited-as inevitably occurs when organizations facedifferential prices for the same commodity [Galper and Toder, 1983].Did everyone gain? Not really. Taxpayers lost, as tax revenues declined. Ineffect, tax benefits were being sold. Congress subsequently prohibited such"sale-leaseback" arrangements, which have no economic justification but toreduce taxes. Nevertheless, the potential for mutual gain for the taxed anduntaxed sectors remains. One skirmish with tax authorities had ended, but the"war"was far from over. Other novel exchanges between the nonprofit andprivate enterprise sectors are predictable. After all, because organizations inboth sectors can benefit from the differential rules under which they operate,the incentive to find ways to overcome the barriers to trade across sectors re-mains.The fact that nonprofits are entwined with private enterprise and governmentis important for a number of reasons, but they all lead to a central question: Arethe contributions of the nonprofit sector sufficient to justify their preferential


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treatment? Thus, I move to the third of my three questions: Do nonprofitorganizations behave differently, and "better," han private firms and govern-ment agencies?DO NONPROFITRGANIZATIONSEHAVEIFFERENTLYHAN RIVATEIRMSANDGOVERNMENTGENCIES?HATSTHEEVIDENCE?Nonprofits have been viewed in sharply contrasting ways. Some prominenteconomic analysts see nonprofits as little more than inefficient private firmsthat, without the lure of profit and privategain, waste resources and performno socially desirable role [Alchian and Demsetz, 1972]. Others, however, seea significant role for nonprofits in light of "failures"of both private enterpriseand government [Hansmann, 1980;Weisbrod, 1975;Wolf, 1988]. Both viewsmaywell be right.Some nonprofits maybe inefficient,doing little tojustifytheirexistence but surviving because of subsidies. Others may be highly efficientproviders of services that meet important social needs.Thelist of criteriaforgaugingnonprofitorganizationperformanceis lengthy.It includes: (a) efficiencyandoutput quality, particularly n dimensions that aredifficult forconsumers to observe[Ben-Ner, 1986;Hansmann, 1980;Weisbrod,1988]; (b) access by consumers regardless of ability to pay [Schlesinger, inpress]; (c) provision of collective goods that complement those of government[Weisbrod, 1975]; (d) encouragement of altruisticvalues such as the opportu-nity to volunteer[Wuthnow, 1995];(e) alternatives to "monolithic"governmentin the social welfare arena; and (f) preserving national identity [Schuster,1994]. I will focus primarilyon the first two-efficiency and quality of output,particularlyin dimensions that consumers find difficultto monitor, and meth-ods used to control access to services-but I will also touch on volunteering.Do nonprofits and for-profitsdiffer?Efficiency,OutputQuality,and TrustworthinessThere is some available evidence about quality in nonprofit and for-profitsectors in industries in which they coexist.1 One indicator of quality that isdifficult for consumers to monitor is the use of sedatives in nursing homes. Itis virtually impossible for family members to determine whether a patient isbeing sedated because of medical need or simply to reduce the labor costsassociated with patients that are more active. In nursing homes in the UnitedStates; the use of sedatives was found to be more than four times as great atfor-profit facilities as at church-related nonprofit facilities-12.5 comparedwith 3.0 units per month [Svarstad and Bond, 1984], and medical "need"appearedto be similar. We do not know, however, whether the for-profitfirmswere providing too much sedation, or the nonprofits too little.Although there is some evidence available on institutional quality, it is informs that consumers often have difficultyin assessing. Focusing on the nurs-ing home and mentally handicapped facilities industries in the United States,When commodities are complex, so that it is costly for consumers to gauge performance and,hence, for sellers to warrant the quality of output, organizational form may provide a signal ofquality. Zeckhauser and Viscusi [1990] have pointed out that, in a world of positive costs ofobtaining information, it may be efficient to utilize a proxy for information. Specifically, theynote that "mandatory requirements may be preferable to ... information efforts." Institutionalform could perform an analogous informational role.


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I utilized the Surveyof Institutionalized Persons (SIP). I used two proxies foroutput quality:(a) the amounts of labor inputs per 100 patients;and (b) con-sumer satisfaction with services.2 Here are some highlights of the findings[Weisbrod,1996]:Laborinputs as measuresof quality. Church-relatednonprofit facilities inboth industries provide more labor inputs per 100 beds than do for-profitfacilities.Among nursinghomes, for example,church-related acilitiesemploysignificantlymore full-time(FT)registerednurses (RNs),dietitians,and main-tenance workers,and significantlymore part-time(PT)nurses'aides, mainte-nance workers,and volunteers.Withoutexceptionamong the 41 laborgroupsinvestigated, there was not a single labor input used significantlymore byprivatefirms. Evidencefrom anotherinstitutionallymixed industry, day care,also shows that nonprofitand for-profitprovidersutilize significantlyand sub-stantiallydifferentproduction technologies [Mauser,1993].The magnitude of many of these differences is quite substantial. Church-related nonprofit nursing homes utilized 5.0 FT RNs per 100 beds, nearlydouble the 2.6 at proprietaryhomes; their 2.4 FT dietitians are four timesthe number at a proprietaryhome, 0.6; and they have nearly twice as manyvolunteers-41 persons who volunteer at least once permonth comparedwith24 at a for-profithome.Consumersatisfaction is another measureof quality.The SIP survey askedfamilymembers abouttheir satisfaction-overall andseparatelywithbuildingsand grounds, rooms and furnishings, staff, social activities, and treatmentservices in the nursing homes and mentallyhandicappedfacilities.3Thefindingsstronglyindicate that, in both industries,satisfactionis consis-tentlyhighestat church-related onprofit acilitiesand lowestat for-profitacili-ties. Satisfactionis typically8 to 17percenthigherat church-relatednonprofitsthan at proprietary acilities. Moreover, he nonchurchnonprofitsare indistin-guishablefromfor-profit acilities. Againwe find that nonprofit organizationsare not homogeneous.Access to Services: PricingPolicies and Waiting ListsNonprofitorganizationsmaybe sociallyvaluablenot onlybecauseof the kindsof outputs they produce but also because of the ways they distribute theirservices.Societyoften has distributionalgoalsthat areinconsistentwith unbri-dled privatemarketbehavior.Sale of human organ transplants,for example,has been prohibitedin a numberof countries.2 If systematic behavioral differences were not observed, that would not imply that institutionalform is irrelevant to public policy. It could be the case that competition forces all surviving formsof institutions to behave in similar ways [Hirth, 1993; Wolff and Schlesinger, 1994].3 Family members were also asked whether they "like"or "don't like" the services provided to theirrelative. The overall question was "Do you feel this facility has provided the kind of services andcare [the patient] needs?" Only "yes"and "no"responses were permitted. Other questions involvedspecific aspects of the overall service package: "Do you like or dislike the following facilities andservices offered by [name of facility]? (1) Building(s) and grounds? (2) Condition of the roomsand furnishings? (3) Treatment services-such as medical, nursing, rehabilitation? (4) Relationswith staff? (5) Social activities, things to do?" For this set of five services trichotomous responseswere permitted: "Like t,""Don'tlike it,"or "Don'tknow/no opinion." The context of these questions,following immediately the one on overall satisfaction, was such that it seems reasonable to interpretthem as asking about "satisfaction" with each of the types of facilities and services.


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I have examined patient access in two ways-the organization's pricingpractices, specifically,its price-cost margin (the difference between its chargesand its averagecost), and its use of a waiting list. Thefindingsarethat nonprofitand for-profitorganizations use quite different ways of distributing their ser-vices in both the nursing home and mentally handicapped industries.Price-cost margins differ materially. Otherthings being equal, both churchand nonchurch nonprofits have profit margins that are significantly smallerthan at proprietaryfacilities. Price-cost margins average $80 per month lessat mentally handicapped facilities and $120 per month less at nursing homes.These differences are 12 to 20 percent of the average costs in the two indus-tries-around $600 per month.Waiting lists are also used differentially to control access. Even for-profitfirms find it useful to employ waiting lists on occasion, but their principaldistributional mechanism is price. In both industries, church-related facilitiesare far more likely to have a waiting list-92 percent compared to 65 percentamong nursinghomes, and 92 percentcomparedto 60 percent among facilitiesfor the mentally handicapped.Nonprofitsthat are not church-related are more like proprietaryfacilities intheir use of waiting lists. Among nursing homes these "other"nonprofitshavean estimated 73 percent frequency of maintaining a waiting list, which is notsignificantly more than the 65 percent at for-profitfacilities.AnotherMeasure of Performance-Opportunities o VolunteerOne of the performance measures I noted earlier was the opportunity thatorganizations provide for people who wished to volunteer. I have alreadypointed out the considerably greater use of volunteers by nonprofit nursinghomes and mentally handicapped industries. This is also found in the childday-care industry, where nonprofits involve parents as volunteers far morethan do for-profitfacilities. In a recent survey,only 14percent of parents withchildren in for-profitcenters reported that they volunteer, compared with 51percent of parentsat church-relatednonprofits.Moreover,at nonprofits,nearly50 percent of parents who volunteered worked directly in the classroom, com-paredwith 25 percent of the volunteers at proprietaryfacilities [Mauser, 1993,chapter 6, p. 10].Managerial CompensationStill another way to shed light on the behavior of nonprofit organizationsrelativeto other forms of institutions is to examine the ways they compensatetheir top executives, whose decisions affect organization behavior. A numberof studies of laborcompensation have foundlowerwages in nonprofitorganiza-tions. Some workers appear willing to work for less pay at an organizationthat is engaged in public-servingactivities. In the U.S. legal services industry,for example, lawyers in nonprofit "public interest" law firms were found toreceive pay that is some 15 percent lower than what they could have receivedin private enterprise, given their experience, gender, law school class rank,and law school quality [Weisbrod,1983]. In the hospital industry,top manage-ment was again found to receive 15 to 20 percent lower pay in nonprofithospitals than in their for-profitcounterparts,even though the jobs were foundto be more complex at the lower paying nonprofit hospitals [Roomkin andWeisbrod, 1997]. Not every study has found this pattern [Preston, 1988], how-


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ever, and so the issue of whether pay differentials reflectgreater willingnessto work for anonprofitbecause of itsactivities,or differentialworkerproductiv-ity, is not resolved.The aforementionedhospital study considered not only whether nonprofitspay less, but whetherthey offer different incentives for their top management.It examined 1268hospitalsin 1992,and found thatthe structureof top manage-ment compensation differed materiallyin nonprofitand for-profithospitals.Nonprofits actuallypaid higher base salaries, but for-profithospitals paid farhigher bonuses based on performance,leading to approximately15 percenthigher total compensation. By placing greaterreliance on bonuses, for-profithospitals attract managers who are less risk averse and presumably morewilling to make decisions that involve greaterrisk but also greaterrewards.

POLICYMPLICATIONSND DIRECTIONSORFUTUREESEARCHAssertionsabout the contributions as well as the shortcomingsof privatefirmsand nonprofitorganizations abound, and they give rise to conflictingpublicpolicyprescriptions.Doubtsconcerningthe social desirabilityof privateenter-prisehave been expressedabout manyindustries-hospitals, day-carecenters,and certainlegal services[Mansnerus,1993]-where output qualityis difficultto monitor and write into a contract. Now the debate has expanded to thedesirabilityof for-profitprisons; they alreadyexist in Australia,Britain,NewZealand,and the United States, and are being considered in Canada,France,TheNetherlands,andthe CzechRepublic[Butterfield,1995;Kettl andWinnick,1995;Weisbrod, 1988]. Perhaps they should be nonprofits.What is the future of the nonprofit sector? That depends on nonprofits'success in findingnew sources of revenue. Donations area verylimited source.Volunteer time is importantbut not easily substituted for money. Increaseduser fees and commercial activities all bring troubling side effects. The non-profitsector is entwinedwith the rest of the economy and is likelyto becomeeven more entwined in the future.One matter is both clear and critical:Competitionfor resources is drivingall organizations-nonprofit, for-profit,and government-to search for newmarkets,and a marketthat is new to one type of organizationis quite likelyto be occupied alreadyby another.Thegrowthof nonprofitsectorsthroughoutthe world is thrustingnonprofitsinto the centraldebate over the organizationof society. Until now, the nonprofitsector has benefitedfrom being small andlargely out of sight. Success has changed this, with growing demands foraccountability.Success has its price!BURTON A. WEISBROD is John Evans Professor of Economics at North-western University.

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