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Quality, Reputation and the Choice of Organizational Form

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  • Michael Vlassopoulos

Abstract

This paper revisits the hypothesis that nonprofit organizations emerge in markets that are characterized by contractual incompleteness because they ensure consumers against opportunistic behavior. We extend the Glaeser and Shleifer (2001) framework which studies an entrepreneur's optimal choice of organizational form and service quality when quality is non-contractible into a repeated interaction setting. The main result is that when reputations can be sustained, then for-profit status is the preferred organizational form and high quality services are ensured. This finding suggests that existing explanations of nonprofit organizations that focus entirely on contractual imperfections in the producer/consumer relationship may be inadequate.

Suggested Citation

  • Michael Vlassopoulos, 2009. "Quality, Reputation and the Choice of Organizational Form," Post-Print hal-00677623, HAL.
  • Handle: RePEc:hal:journl:hal-00677623
    DOI: 10.1016/j.jebo.2009.02.014
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-00677623
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    References listed on IDEAS

    as
    1. Glaeser, Edward L. & Shleifer, Andrei, 2001. "Not-for-profit entrepreneurs," Journal of Public Economics, Elsevier, vol. 81(1), pages 99-115, July.
    2. Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1127-1161.
    3. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-329, March-Apr.
    4. Carl Shapiro, 1986. "Investment, Moral Hazard, and Occupational Licensing," Review of Economic Studies, Oxford University Press, vol. 53(5), pages 843-862.
    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. Johannes Hörner, 2002. "Reputation and Competition," American Economic Review, American Economic Association, vol. 92(3), pages 644-663, June.
    7. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716.
    8. Susan Rose-Ackerman, 1996. "Altruism, Nonprofits, and Economic Theory," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 701-728, June.
    9. repec:hrv:faseco:33078971 is not listed on IDEAS
    10. David Easley & Maureen O'Hara, 1983. "The Economic Role of the Nonprofit Firm," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 531-538, Autumn.
    11. repec:hrv:faseco:30727607 is not listed on IDEAS
    12. Benoit, Jean-Pierre & Krishna, Vijay, 1985. "Finitely Repeated Games," Econometrica, Econometric Society, vol. 53(4), pages 905-922, July.
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    Cited by:

    1. Ghatak, Maitreesh & Mueller, Hannes, 2011. "Thanks for nothing? Not-for-profits and motivated agents," Journal of Public Economics, Elsevier, vol. 95(1-2), pages 94-105, February.
    2. Jones, Daniel B. & Propper, Carol & Smith, Sarah, 2017. "Wolves in sheep’s clothing: Is non-profit status used to signal quality?," Journal of Health Economics, Elsevier, vol. 55(C), pages 108-120.
    3. Lapo Filistrucchi & Jens Prüfer, 2013. "Nonprofits are not alike: The Role of Catholic and Protestant Affiliation," Working Papers - Economics wp2013_07.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.

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    More about this item

    Keywords

    L14; L30; Nonprofit Status; Reputation; Contractual Incompleteness;
    All these keywords.

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L30 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - General

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