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

Author

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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.

Suggested Citation

  • Petra Brhlikova & Andeas Ortmann, 2006. "The Impact of the Non-distribution Constraint and Its Enforcement on Entrepreneurial Choice, Price, and Quality," CERGE-EI Working Papers wp299, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
  • Handle: RePEc:cer:papers:wp299
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    File URL: http://www.cerge-ei.cz/pdf/wp/Wp299.pdf
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    References listed on IDEAS

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    1. Roland, Gerard & Verdier, Thierry, 2003. "Law enforcement and transition," European Economic Review, Elsevier, vol. 47(4), pages 669-685, August.
    2. Geoffrey Heal, 1976. "Do Bad Products Drive Out Good?," The Quarterly Journal of Economics, Oxford University Press, vol. 90(3), pages 499-502.
    3. 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.
    4. Marc Bilodeau & Al Slivinski, 1998. "Rational Nonprofit Entrepreneurship," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 7(4), pages 551-571, December.
    5. 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 615-641, August.
    6. 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.
    7. 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.
    8. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
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    Cited by:

    1. Gabriela Vaceková & Zuzana Prouzová, 2014. "Non-profit Commercial Revenues. Evidence from the Czech Republic," Working Papers 16, Masaryk University, Faculty of Economics and Administration, Department of Public Economics, revised Dec 2014.
    2. Erwan Queinnec, 2011. "Do Not-For-Profit Organizations Meet A Demand For Trust Goods ? A Reappraisal Of The Contract Failure Theory
      [Resoudre Un Probleme D’Asymetrie D’Information En S’Abstenant De Faire Du Profit : Les
      ," CEPN Working Papers hal-01367931, HAL.

    More about this item

    Keywords

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

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law

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