Why are there nonprofit organizations?

Organization Level

One can predict the legal form of most organizations if one knows the industry and nation-state in which they operate. Residual variation (and NPOs) are encapsulated in a relatively small, albeit important, set of industries where two or more forms are well represented: in the United States, hospitals, daycare, museums, universities, home health care, social services, broadcasting, and a few others.

Many such industries comprise well-defined niches (commercial television and public broadcasting). Given an account of activities and official goals, one can identify legal form with almost complete accuracy. In some (hospitals, daycare), NP and FP forms compete within the same niche, a situation likely to be unstable. In a few cases (local arts agencies, which include NP, public, and hybrid specimens), form is weakly related to niche but competition is minimal. Few studies explore why entrepreneurs select particular legal forms when they have a choice, or why some organizations change form Factors suggested in the literature include founder dispositions [e.g. religious values, profit-mindedness, risk averseness, or altruism (James & Rose-Ackerman 1986)], access to capital markets (Hollingsworth & Hollingsworth 1987), and eligibility rules for government aid (DiMaggio 1987).

Industry Level: The Division of Labor Among Forms

economic theory Economists have done much on this topic (Hansmann 1987, Rose-Ackerman 1986). According to Hansmann, the nondistribution constraint renders nonprofit organizations more likely than for profit organizations to use consumers' and donors' dollars reliably for service provision: directly, because monitoring and enforcement make profiteering risky; and indirectly, because entrepreneurs preoccupied with profits apply their talents elsewhere. Thus to predict which industries will be NP-dominated we must ask: When do consumers require the assurance the nondistribution constraint provides? The answer: When they cannot make informed choices because (a) donors buy services for unknown third parties (overseas charities), (b) known beneficiaries are seen as unreliable witnesses to service quality (daycare centers, mental hospitals), (c) pooled donations cannot be tracked to specific services (political advocacy), or (d) services are so complex that ultimate consumers cannot evaluate their quality and so important that low quality poses unacceptable risk (medical care) (Hansmann 1980). Weisbrod (1988) suggests that NPOs emerge for these reasons in particular sectors of industries: e.g. providing high-quality services with special attributes that are hard to detect, or serving low-education consumers with insufficient access to product information. Hansmann (1981) offers a separate explanation, emphasizing voluntary price discrimination through donations, for the few industries (e.g. theatres, universities) in which services are consumed by purchasers who are able to assess their quality.

Weisbrod (1988) employs public-choice ideas to explain the relative prevalence of NPOs and government in providing collective goods (those from the benefits of which free riders cannot be excluded). Government, which supplies such goods at levels demanded by the median voter, is preferred when demand is homogeneous because it can tax away the free-rider problem. When demand is heterogeneous, citizens who want more or different goods than the state provides form NPOs to supplement public provision. As wealth rises, demand for collective goods increases, causing government to replace NP providers. With still greater wealth, substitution of private for public goods (e.g. bottled spring water for good municipal water works) leads to declining state provision (Weisbrod 1977).

Such ingenious arguments go far to explain which industries are likely to have NPSs. But their capacity to explain variation in NP activity within industries over time and space is limited. First they neglect supply-side factors, especially social cohesion among potential beneficiaries or entrepreneurs (Ben-Ner & Van Hoomissen 1989), that influence the capacity of NPOs to respond to demand. Second they view states as competing providers rather than (as is often the case) financiers or consumers of NP services. Third, they neglect such institutional factors as state policy, organizing norms, ideology and religion.

historical perspective In historical perspective, US NPOs appear less a single form than a kind of cuckoo's nest occupied by different kinds of entrepreneurs for different purposes. Three entities-status groups, professions, and the state - have been particularly active.

Status groups US NPOs were differentiated from for-profit firms over the course of the nineteenth century (Hall 1982). In the late 1800s, impetus for the formation of NPOs came from emerging upper classes eager to control unruly urban environments and to define social boundaries. The charitable and cultural enterprises of the Gilded Age performed such new public functions as social welfare and aesthetic improvement in ways the market could not support and the polity might not tolerate (McCarthy 1982, Story 1980).

Urban elites remain prominent in NPO governance, largely as members of boards of trustees and volunteer committees. Evidence suggests that such activities promote and maintain upper-class solidarity and permit elites to monitor and control NP policies (Salzman & Domhoff 1983, Ostrander 1987, Daniels 1988). The character of elite influence may be changing, however. Local upper-class patrons and trustees are losing influence in many fields due to declining dependence on donations, increased support from government, and managerial professionalization. Greater demand for trustees as the number of NPOs has risen renders some boards more heterogeneous than in the past. Most important, the central role in elite participation has moved from local upper classes to corporate managers, who are recruited on the basis not of kin but of company affiliation (Useem 1984). Although demographically similar to traditional trustees, many are "corporate rationalizers" (Alford 1975), impatient with communal governance styles and supportive of managerial reform (DiMaggio 1991). And direct company giving has become more generous and systematic (Useem 1987, Galaskiewicz 1985). Attracting prestigious trustees and corporate support sustains NPOs' legitimacy and revenues (Zald 1967, Provan 1980).

Other status groups (workers, ethnic and religious communities) form NPOs. [The number of churches strongly predicts intercounty variation in the NP share of employment in four New York state multiform industries (Ben-Ner & Van Hoomissen 1989)]. Although lacking definitive data, we suspect that such NPOs are often less stable, less likely to incorporate, and less likely to claim community-wide missions than those created by the wealthy. Many status-based NPOs (including those attached to upper classes) resemble bureaucracies less than formal structures draped around the ongoing life of densely connected networks, geared to producing "goods" (solidarity, self-esteem, distinction, work experience, opportunities for association) external to formal missions (Rothschild-Whitt 1979, Milofsky 1987). [For economic models of NPOs emphasizing status groups, see Ben-Ner 1986, Hansmann 1986; see also reviews of specialized literatures on social movement organizations (Jenkins 1987) and voluntarism (Van Til 1988).]

Professionals During the Progressive Era the organizing impulse shifted from local upper classes to nationally mobilizing professionals. Majone (1984) notes a similarity between the justifying ideologies of professions and of NPOs: service ethos, autonomy from market values, and exercise of expertise on behalf of the common good. Although some professionals (lawyers, accountants) found the FP form suited to their needs, most turned to NPOs. In hospitals, universities, and social-service agencies, by the 1920s professionals employed by NPOs dominated national discourse and organization, while sharing local authority with upper-class trustees (Perrow 1963, Starr 1982).

Professionals retain much influence in many NPOs. Hospitals vie for doctors, who bring prestige and patients; some economists view NP hospitals as, in effect, physicians' cooperatives (Pauly & Redisch 1973). But scholars agree that medical authority has declined due to supply factors, regulatory and competitive pressures, and changes in administrative rules and structures (Gray 1990, Starr 1982). Declines are also noted in the organizational power of social workers (Kramer 1987), professors (Freidson 1986), and curators (Peterson 1986).

Nonetheless, in most fields nonprofit organizations remain more conducive than for-profits to professional autonomy by virtue of their charters, which mirror professional ideologies; governance systems, which often include professional participation; and revenue structures, which empower professionals with access to private donors-doctors, curators-or funding agencies-academics. Moreover, the declining influence of particular professions often reflects increased competition for organizational authority-Scott (1983) reports that hospitals employ workers in up to 200 professions-and the gravitation of power in many NPOs from service to techno bureaucratic professions (Larson 1977). The persistent elective affinity between NPOs and professionals is reflected in the greater propensity of NPO-employed than of other professionals to espouse "new class" social and political views (Brint 1987, Масу 1988).

The state By 1960 the engine of voluntarism had shifted again, this time, ironically, to the state, with the growth of "third-party government", that is, state delegation of functions by grant or contract to NPOs (Salamon 1981). Far from competing over a fixed set of functions, the US domestic state and NPS grew in tandem, the former expanding domains of public responsibility and financing programs the latter implemented. By 1975, government had replaced private donors as the largest source of NPO revenues.

Although early work noted increased interdependence between public and NP sectors (Smith 1975, Kramer 1981), Reagan administration domestic budget cuts provided stimulus to and a laboratory setting for research. Studies have documented the financial dependence of NPOs on the state (Salamon & Abrahamson 1982), investigated effects of federal cutbacks (Altheide 1988, Wolch 1990, reviewed in Salamon 1987) and proposed theoretical accounts (Kramer 1987, Gronbjerg 1987).

institutions An historical perspective brings into focus explanatory factors that play little role in economic models (which in turn possess an elegance that more historically attentive explanations lack). Specifically, the prevalence of NPOs within industries is related to three aspects of institutional structure.

Key decisions Pivotal decisions by organizational entrepreneurs are institutionalized in models that raise the cost of new forms while making it inexpensive to adhere to tradition (Stinchcombe 1965, DiMaggio & Powell 1983). Mechanisms reproducing existing forms include interorganizational networks seeking state restraint of entry by new kinds of providers; scale economies in organizing due to availability of models and experienced participants (Marrett 1980, Wievel & Hunter 1985); and consumer expectations resistant to change. Thus, initial choices of form, which may be subject to large stochastic elements, exert long-term effects.

Public policy Comparing US states, Hansmann (1985) reports significant relationships between tax policy and the NP proportion of schools and nursing homes. Econometric studies summarized by Jencks (1987) reveal the influence of tax rates on private donations. Within industries, narrow decisions are consequential: the Supreme Court's Thor ruling on inventory depreciation made NP publishers more attractive to authors who want to keep their books in print, benefitting university presses that had experienced severe competitive pressures (Powell 1985). Medicare cost-plus reimbursement encouraged FP entry in the hospital field; the switch to Diagnosis Related Groups (DRGs) slowed the pace (Gray 1990). Weisbrod (1988) demonstrates varied effects of different forms of government financing on public donations to NPOs. Hunter (1981) describes how expanded federal responsibility led community advocates to shift from neighborhood organizing to national federations.

Climates of opinion Perceptions of the trustworthiness of forms (rather than measurable differences) shape decisions of consumers and policy makers (Hansmann 1987). Certain goods are seen as inappropriate for market exchange or requiring special protection from corruption by the profit motive (Titmuss 1971, Hansmann 1989), and definitions of "public goods" and "community needs" vary over time (Gronbjerg 1986).

ecology The arguments reviewed have been implicitly ecological: they portray for-profit, nonprofit, and public forms as competing or cooperating within industries, the success of each determined by material and ideological environments. It follows that an ecological approach (McPherson 1983, Hannan & Freeman 1989) is well suited to test theories about the intersectoral division of labor. One must transform such arguments from hypotheses about proportions of activity (in which form they have thus far been tested) into propositions about change over time in birth and death rates of NP, FP, and public firms and transition rates from one form to another. Although such rates may move in tandem (e.g. the same factors may simultaneously generate high death and low birth rates for NPOs and low death and high birth rates for FPs) it is likely that different factors influence different rates and that no one theory of industry composition will suffice. Some recent studies take an ecological approach to populations consisting predominantly or exclusively of NPOs, including human-service agencies (Singh et al 1990), minority organizations (Minkoff 1988), trade associations (Aldrich et al 1989), hospitals (Alexander & Amburgey 1987), and art museums (Blau 1989). But none has designed population models to test explanations of the kind reviewed here.

Explaining Cross-National Variation

Theories of NPO prevalence originated in work on the United States. NPOs outside the United States and comparative issues have just recently begun to receive attention (James 1987b, 1989, Anheier 1990, Anheier & Seibel 1990). Key issues are summarized below under six headings.

organizational and sectoral equivalence Few countries use the term "nonprofit sector." Nonetheless, comparative researchers assume implicitly, that the French economie sociale (Forse 1984), the United Kingdom's voluntary sector (Knapp et al 1990, Ware 1989), the German gemein-ntitzige Organisationen (Anheier 1988), and the US nonprofit sector share many central features. Comparativists face difficulty in establishing cross-national equivalence, however. Rosas (1984) reports that NPOs like the Red Cross, for example, receive different treatment in different nations. Hood & Schuppert (1988) demonstrate cross-national differences in regulatory and tax treatment of semipublic NPOs (including such hybrids as quasi-nongovernmental organizations-QUANGOs). Such difficulties reflect variation in principles of definition and classification, ranging from France's etatist tradition, which discourages intermediate corporate forms between citizen and state (Archambault 1990), to the incorporation of such organizations in the fabric of consociational democracies in the Netherlands (Lijphart 1984), Austria (Katzenstein 1984), and Belgium (Billiet 1984).

Differences in legal tradition further confound comparison. In Roman law countries, the nondistribution constraint is less central to distinguishing NP from FP enterprise than is an organization's professed mission, a difference based on civil-law notions of "ideal" vs "commercial," and "private law" vs "public law," associations. The resulting classification of organizations as public, commercial, or noncommercial ("ideal") yields sectors not readily comparable to those in common law nations. Service-providing "commercial" NPOs enter commercial GNP accounts, even if they do not distribute profits; NPOs almost entirely financed by the state are included in public GNP (Venanzoni 1981). The role of organized religion, ranging from voluntary congregations to state churches, further complicates the search for sectoral equivalence. In West Germany, for instance, churches enjoy far-reaching internal regulatory autonomy under ecclesiastical law, which is constitutionally equivalent to secular law, and church and secular foundations form parallel universes. Available public statistics on German foundations refer to the 5,000 secular foundations only, rendering 40,000 Catholic and 15,000 Protestant foundations almost invisible in official accounts (Anheier 1988).

heterogeneity Following Weisbrod, James (1987b) argues that society's religious, ethnic, and ideological heterogeneity generates differentiated demand for collective goods and stocks of religious entrepreneurs. James finds substantial, if qualified, support for this position in research on cross-national variation in the size and scope of NP primary and secondary education. Heterogeneity alone is insufficient to generate effective demand if different groups are markedly unequal in political power, however. The extent to which religion, ethnicity, and language are correlated with one another and with social status (Blau 1977) should condition the effect of social heterogeneity on NPSs.

value rationality NPOs are often based on strong ideological, especially religious, orientations: value-rational rather than means-rational, in Weber's terms. Cross-national variation in such values and in religious traditions influences the size and form of NPSs: in the only cross-national quantitative analysis, James & Levin (1986) found religious factors significant predictors of the proportionate role of private schools.

historical contingencies Because NPOs adapt less quickly to environmental change than do FPs (which are subject to market discipline) or government agencies (which are politically accountable), NPSs incorporate and preserve responses to historical political and social conflicts. Anheier (1988) suggests that the present legal, organizational, and political profile of the German NPS more clearly reflects the structure of German society between 1900 and 1933 than it does that of contemporary Germany.

intersectoral relations Variations in relations between nonprofit organizations and state and corporate sectors also influence cross-national variation in NPO prevalence and role. For example, US corporations make substantial donations to certain NP subsectors, a practice far less common in most of Europe. The structure of state/NP relations is also crucial: e.g. whether NPOs are subject to fragmented centralization coordinated through grants (Scott & Meyer 1990) or are integrated into corporatist systems of interest mediation and conflict accommodation (Lijphart 1984).

polity structure National societies develop distinctive political traditions and institutional models that are imprinted in national dispositions toward organizing (Jepperson & Meyer 1990). Definitions of public and private, and the division of labor between public and private sectors, are neither stable nor formalized, but rather tend to shift over time (Kramer 1981). Bauer (1987) contends that NPSs' political orientations reflect the regulatory regimes under which they operate. Many Roman law nations, especially the more centralized, have state-oriented NPSs, with NPOs more similar to state agencies than to FPs, and sectoral cultures that emphasize service provision over volunteering. By contrast Common law countries have market-oriented NPSs with the opposite characteristics. The social democracies are a special case; their decommodification of goods and services and redefinition of services as "entitlements" militate toward larger states and smaller NPSs (Esping-Anderson 1988).

Cross-national research underscores the limits of economic explanation and the centrality of institutional factors. Microeconomic approaches cannot explain cross-national variation in the size and composition of NPSs because they take account of neither religious nor political factors (James 1987b). In such political orders as the Dutch verzuiling, French etatisme, Germany's Subsidiaritat, either the state or religious entrepreneurs allied with political elites developed the NP form. Models that posit instrumentally rational actors and an umpire state without influence on sectoral boundaries or institutional choice are ill equipped to deal with such cases.

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