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The Impact of the Non-distribution Constraint and Its Enforcement on Entrepreneurial Choice, Price, and Quality

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  • Petra Brhlikova
  • Andeas Ortmann

Abstract

We study the conditions under which it is rational for a representative entrepreneur to start a nonprofit firm. Taking as point of departure a model of entrepreneurial choice proposed by Glaeser and Shleifer (2001), we analyze consequences of weak enforcement of the non-distribution constraint on entrepreneurial choice and price and quality of the product. We find that the nonprofit organizational form becomes unequivocally more attractive to entrepreneurs if enforcement of the non-distribution constraint is weak. We also nd that the quality delivered by nonprofit firms is lower under weak enforcement than that of the nonprofit firm under strict enforcement, but higher than the quality delivered by a for-prot rm. We discuss the implications and limitations of our results.

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Paper provided by The Center for Economic Research and Graduate Education - Economic Institute, Prague in its series CERGE-EI Working Papers with number wp299.

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Date of creation: Jul 2006
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Handle: RePEc:cer:papers:wp299

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Keywords: Entrepreneurial choice; Nonprofit; For-profit; Non-distribution constraint; Enforcement;

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  1. Marc Bilodeau & Al Slivinski, . "Rational Nonprofit Entrepreneurship," Industrial Organization 9405001, EconWPA.
  2. Roland, G. & Verdier, T., 2000. "Law Enforcement and Transition," DELTA Working Papers 2000-25, DELTA (Ecole normale supérieure).
  3. Harrison Teresa D. & Lybecker Kristina M., 2005. "The Effect of the Nonprofit Motive on Hospital Competitive Behavior," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 4(1), pages 1-17, May.
  4. Daniel Friesner & Robert Rosenman, 2001. "The Property Rights Theory of the Firm and Mixed Competition: A Counter-Example in the US Health Care Industry," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 8(3), pages 437-450.
  5. Hirth, Richard A., 1999. "Consumer information and competition between nonprofit and for-profit nursing homes," Journal of Health Economics, Elsevier, vol. 18(2), pages 219-240, April.
  6. Heal, Geoffrey, 1976. "Do Bad Products Drive Out Good?," The Quarterly Journal of Economics, MIT Press, vol. 90(3), pages 499-502, August.
  7. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
  8. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
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