Economic Theories of the Social Sector: From Nonprofits to Social Enterprise

Maitreesh Ghatak

doi:10.31389/lseppr.16

Abstract

Economic theories of organizations that depart from the standard models of profit-maximizing firms are reviewed. This document will discuss earlier theories of nonprofit organizations that focus on contract failure and will argue that this framework that underlies those theories cannot explain hybrid organizational forms such as social enterprise. These forms aim to balance social and financial objectives in order to avoid the rigidity of both for-profit and nonprofit forms. Conditions under which a social enterprise is likely to be preferable to either a nonprofit or for-profit alternative are characterized. Additionally, this paper highlights the importance of selecting managers and workers who are motivated by the mission of an organization.

Highlights

The social sector comprises of a whole spectrum of organizations that are not purely for-profit organizations nor directly run by the government.1 It incorporates a range of organisation types, including nonprofit, community, civil-society, and charitable organizations
This paper argues that while this literature has provided a convincing explanation of why the nonprofit form may be a constrained efficient solution to certain underlying contracting problems, it does not provide a clear framework to explain the rise of hybrid organizational forms – social enterprises, in particular – that flexibly combine features of both nonprofit and for-profit organizations
A key part of the analysis focuses on the interaction between the selection of pro-social individuals in the social sector and the mission-integrity problem

Summary

Introduction

The social sector ( called, among other names, the voluntary and the third sector) comprises of a whole spectrum of organizations that are not purely for-profit organizations nor directly run by the government.1 It incorporates a range of organisation types, including nonprofit, community, civil-society, and charitable organizations. Social enterprises exist between the two, being neither traditional profit-maximizing firms, nonprofits, or government agencies.11 These hybrid forms of organization are often referred to as “social enterprises” even though, as Martin and Osberg acknowledge, many other types of firms operate under that banner [14].

Results

Conclusion