Transfers, transaction costs and charitable intermediaries

Abstract

The analysis of transactions lies at the heart of economics. For the most part, however, attention has focused on the nature of exchange and on the implications of exchange transactions for the structure of markets. In this paper the emphasis is changed. Attention is directed instead to the characteristics of transfer transactions and to the nature of the intermediaries operating in this sector of the market. The defining characteristic of a transfer transaction, as the term is used in this paper, is the absence of a reciprocal sacrifice of property rights by transacting parties.’ In contrast to exchange, which is conditional on a mutual sacrifice of rights, a direct transfer between donor and recipient requires only that the recipient be willing to accept the gift.’ Both types of transaction may be effected either directly (between buyer and seller, or between donor and recipient) or indirectly through an intermediary. In the case of exchange, the essential nature of the transaction is independent of an intermediary. This is not so for transfers. A transfer of property rights from donor to intermediary is conditional on the exercise of those rights in a particular way, or for the benefit of a particular purpose. This paper is concerned exclusively with this type of conditional transfer, and with the costs imposed on donors in monitoring the behavior of charitable intermediaries.3 It is argued here that two mechanisms have evolved by which the costs of monitoring may be reduced. One is through the operation of a system of law in which the terms of a conditional contract between donor and intermediary may be defined and enforced. This is the basis of nonprofit legislation in general, and of the law of charity in particular. In addition, donors may also seek to retain control over the use of their gift by supporting only those nonprofit organizations in which the degree of independent discretion available to internal agents in allocating resources is constrained. In a competitive environment it is predictable that the characteristics of those firms existing in equilibrium will depend primarily on the preferences of donors, and in particular on their search for an efficient form of organization to complement the operation of the law. One of the primary objectives of this paper is to examine the implications of this line of argument for the characteristics of charitable intermediaries. The paper is organized as follows: Section 2 examines the role of law in facil-