Non-Profit Enterprises? Flashcards
Non profit enterprises?
- ‘Institutions which cannot distribute residual profits and issue no claims to profit’ – Ricketts
- Profit is a means not an end
- Perhaps a board of trustees who appoint managers to run operations and ensure activities are in line with objectives
BUPA - British United Provident Association?
- More than 32m customers in 190 countries
- No shareholders and reinvests any money it makes in providing health and care to more people
- Hospitals, care home, retirement homes
- Multinational in outlook – owns Sanitas in Spain, interests in Australia, USA and Middle East etc.
Hansmann - categories?
- Commercial non-profit enterprise i.e. where sales are key revenue source
- Donative non-profit – enterprise getting subsidy i.e. state; versus voluntary or private sources
- Some feature all
What about nationalised industries?
- Government owned
- Commercial non-profit category?
- But ministers may require them to make profit
- Probably in category of own – as taxpayers are the owners in a way
- Any profits/losses accrue to taxpayers – implicit sharing of residual
Distribution of voluntary organisations by area of activity 2014/15?
Mostly in social services and culture and recreation
- Face challenges such as with COVID-19
- Increased levels of demand for their services
- Could at same time lose considerable proportion of revenue following closure of charity shops and other venues and cancellation of fundraising events
- National Council for Voluntary Organisations estimated charities overall may lose around $4 billion over a 12 week period as a result of the pandemic
- Lots of government support
Effort incentives and managerial discretion expected to be serious problem?
- Other non-profit performance bonuses difficult to devise/measure/monitor
- No take-over – no market for corporate control, fewer managerial labour markets etc.
- What would we expect?
- Poor productive efficiency
- Poor survival rate? Only survive with an ‘exclusive privilege’ e.g., tax and legal procedures
Implicit monitoring?
- Legal obligations of trustees – in some cases can be financially liable
- Fund raising performance (proxy for managerial labour market)
- Given lenient tax regime (Gift Aid etc., covenants) – tax authorities may be strict
Also -
* Employees may monitor trustees – especially if a homogenous group with similar objectives
* Employees gain satisfaction from successful achievement of objectives – confers joint benefit on workers – interest in quality provides incentive to monitor
* Competition in product market
* Also likely to have a passion in the field – e.g., won’t work in RSPCA if you don’t like animals
Rationale for NPEs - information - a response to adverse selection/contract failure?
- Non distribution of residual is consumer protection device where they cannot observe quality of purchased products and services
- Donations – reassures contributors/volunteers that their money will not be used to augment profits – given donors have difficulty monitoring
- Resources may be used inefficiently – but likely to be to donors satisfaction
Rationale for NPEs - government failure?
- NPEs > adjustments to quantity of public goods produced by government (air ambulance)
- Non-profit firms then pursue collective purposes unsatisfied by government
- Donor behaviour – free riding of donations of others – but philanthropy may give status
Rationale for NPEs?
- VAT
- Covenants
- Gift Aid
- But there were plenty of such enterprises before tax breaks came into being?
NPE examples - Universities?
- Cardiff uni is a charity
- Teaching?
- Research may be a better example –
- Contract failure
- Research doesn’t always lead to marketable discovery but can contribute to scholarly climate and future pay offs
- Research also includes free rider problem and if people willing to give donations to research may be assured by not-for-profit status
So universities that teach and do commercial research little to gain from not for profit status?
* Some colleges in US do limited research of public good nature, but still receive large donations from alumni
* Then allows colleges to educate students at lower cost (students get almost an implicit loan which some repay later as donations)
* A voluntary student loans system
* A response to market failure in providing adequate loans through more formal mechanisms
Clubs?
- Health clubs, social clubs etc.
- Collective goods for members
- For given size of club, members decide how much of jointly consumed good to finance
- If they share cost equally, will improve facilities to point where marginal private benefit to each = extra club fee implied
- Or for each level of service provision an optimum membership size
- But why in not-for-profit form?
- Capital requirements of health facilities would make for-profit enterprise more likely
- Exceptions?
- Clubs may not finance an output of joint benefit, but produce the output e.g., social clubs produce output deriving from interactions of members
- If run on profit lines, proprietor may act to appropriate some of the value of the social environment produced by members
- Avoiding situation where membership based on willingness to pay (market fails)
Arts?
- May be difficult for arts and theatre company to full overheads
- Donations can function as voluntary price discrimination
- Donation finance costs which are strictly joint to all audience members
- May allow productions which would not otherwise go ahead
- Donors contribute – happy that money not going for profit but to lower seat prices or enable production
- Average costs fall as audience size increases – but no single ticket price will cover costs
- So price discriminate – better seats = higher price
- Differential pricing required to break even
- Audience with greater willingness to pay will choose expensive seats even though their valuation falls short of price differential
- Voluntary price discrimination reveal willingness to pay and finances benefits which are joint to the whole audience
- May also be social status considerations
