European Journal of Economic and Financial Research
ISSN: 2501-9430
ISSN-L: 2501-9430
Available on-line at: http://www.oapub.org/soc
Volume 2 │ Issue 1 │ 2017
doi: 10.5281/zenodo.438919
EMERGENCE OF NON-PROFIT ORGANIZATION
WITH ITS PROSPECT
Kuei, Tang Lin
National Kao-shiung Normal University, Taiwan
Abstract:
The explanations of how and why non-profit organizations are formed have been
provided since decades ago. Along the time, researchers have come out with more and
more hypotheses and theories in this field. By analysing various ideas form different
points of views, the changing of marketing and social situation can be substantially
depicted. The comparisons among the existing theories may also give us a clearer
understanding on the formation of non-profit organizations. We may then observe this
field with a more comprehensive view, and seek to move forward.
JEL: D23, L31, L39, H41
Keywords: non-profit organization, formation, Weisbrod revisited, stakeholder
research
1. Introduction
In 1975, Burton A. Weisbrod published an article, in which he approves non-profit
organizations that fulfilled the shortages of the demands for public goods. He provides
a fundamental model of the formation of non-profit sectors. After more than twenty
years, Bruce R. Kingma (1997) provided an article about the theories of public goods in
the non-profit organizations, based on the revisited Weisbrod’s model. In Kingma’s
article, Weisbrod’s theories are not only reviewed and expanded, but also come through
empirical tests. There are lists of different theories proposed by other researchers along
the years as well. In Kingma’s article, he gives analysis and comparisons among all the
theories and Weisbrod’s model. As another decade passed, Stijn Van Puyvelde and
William A. Brown (2016) provided another empirical article to explain the reason why
non-profit organizations exist. They process a more consolidated structure to figure out
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EMERGENCE OF NON-PROFIT ORGANIZATION WITH ITS PROSPECT
the diversities in non-profit sector density. They come up with various hypotheses
depended on peculiar dimensions of the formation of non-profit sectors. They also go
through an investigation about the determinants of non-profit sector density, and
submit actual data as the result of their research. In the end of their article, they give
evidence and explanations to their hypotheses.
Those examinations and extensions to the Weisbrod’s model by Kingma (1997),
as well as the hypothesis by Stijn Van Puyvelde and William A. Brown (2016) will be
firstly introduced in this article. The beginning paragraphs are meant to give an
overview to all the theories and hypotheses throughout the decades, followed by a
discussion of the research question: “Why do we need new theories, as Weisbrod already
provided a model thirty years ago?” Finally, this article will end with a summary of those
theories and a concluding thought of the answer to the research question.
2. Important Theories from the Weisbrod revisited by Kingma (1997)
It was considered by Weisbrod that there was discontented demand for the public
goods under government’s operating. In Weisbrod’s model, non-profit organizations
exist because they would satisfy the demand which the government fails to provide.
Those people who seek the improvement of the supply of public goods would be the
ones who donate to non-profit organizations, which is how the organizations are
financed. This model obviously shows a proper understanding of how the non-profit
sectors were formed in the market by that time. However, this model has been
questioned and revised by other researchers over these years. The necessity of those
revisions will be discussed in the later chapter. The followings are the theories provided
by Weisbrod in the past, together with the extensions of them from other researchers
along the time.
2.1 The original ideas and the revisions of them
In this part, we are going to discuss some of the major theories provided by Weisbrod,
such as the pure public good theory, the impure altruism theory, the output of the nonprofit sector, the heterogeneity hypothesis, and the trust theory. Weisbrod’s original
ideas will be firstly introduced. According to the ever-changing market and society, it is
difficult to avoid newly popping-up opinions from arguing with the original thoughts.
Consequently, we will also demonstrate other researchers’ theories to show how have
the logic changed over the decades.
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a) The pure public good theory
To begin with, we learn the pure public good theory from Weisbrod, suggesting that if
donative non-profit organizations implement pure public supply, an expansion in
government spending will have dollar-for-dollar "crowd-out' to altruistic contributions.
Nonetheless, over the time, other researchers have found evidence to prove the fact that
it should not be exactly one dollar to one dollar. For example, studies from Kingma
(1997) and Kingma and McClelland (1995, P. 66, 1, 65-76) show a cutting of 15 to 19
cents for every dollar of governmental spending on the public radio station. To sum up,
the fact of less than dollar-for-dollar crowd-out indicates that the Weisbrod’s original
idea of donative contributions does not completely speak for the performance of
donors. In fact, to make benefaction to non-profit organizations, there must be
something extra than the provision of mere public service to attract donors. This idea
leads us to the theory of impure altruism.
b) The impure altruism theory
The idea of impure altruism explores the effects of individual motivations on the
behavior of contributors. We see that the theory of impure altruism suggests that
donors gaining both public and private advantage from their contributions. The
personal benefits such as social reputation, fame, comfort of guilt, power of controlling
over certain organizations, or a pair of warm gloves are things donors might receive
from giving. Correspondingly, as government spending increasing, the contributions
offered by donors do not cut back dollar-for-dollar, since the donors earn the personal
advantages from their contributions. All in all, the crowd-out less than one dollar for
one dollar is approved by the impure altruism theory, which makes the theory more
rational to the real situation.
c) The output of the non-profit sector
The non-profit supply was commonly taken as public good provided by non-profit
sector. Nevertheless, Weisbrod believes that instead of taking the output as public good,
but creating it as a private good with specific expanse will let for-profit bodies to rival
by releasing a similar product into the market. Due to the competition, non-profit
organization may be dominated more efficiently and therefore increase non-profit
supply.
The idea from current studies point out, even though there is a growth of
funding from governmental spending, non-profit organizations may not develop the
quality of their public supply, but only decline the dependence on donations.
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d) The heterogeneity hypothesis
The heterogeneity hypothesis is estimated as the principle testament of Weisbrod’s
theory. The original idea states that in more heterogeneous societies, a higher density of
non-profit organizations will appear. Since the mixed citizens share more diverse
preferences than the average community. However, Ben-Net and Van Hoomissen (1991
P.62, P.519-50) propose that a certain numbers of parties with related preferences must
live within a heterogeneous community. In other words, besides the variety of
preferences, a non-profit organization will only be brought into existence when there
remains a group of people share common preferences.
New researches propose that for the sake of financially supporting a non-profit
organization, there must be an adequate number of people share identical preferences.
The identical preferences should be unlike the major preferences within the society and,
meanwhile, are also dissatisfied under governmental control.
e) The trust theory
In the end, we see the concern of the unequal knowledge between the consumers and
the producers, which leads us to the trust theory. There are possibilities when consumer
cannot believe for-profit bodies to offer products or service in an acceptable quality or
quantity. As a result, non-profit provisions are more likely to convince consumers. In
fact, people turn to view non-profit organizations as a sign of trust.
In the same way, the supplies of the true information are regarded as a public
good provided by the non-profit organization. In short, handing over genuine
knowledge about the value of products is considered as a public supply. To be honest, it
will not be exaggerate to describe the true information as the only pure public supply in
this field, as it may be.
2.2 The comparisons among theories showed in table
Theory
Weisbrod’s version
Others’ expansion
The pure public
If non-profit organizations carry out pure
The crowd-out is normally less than
good theory
public
in
dollar-for-dollar. For example, for the
government funding will have dollar-for-
public radio, the crowd-out is 15-19cent
dollar
for one dollar.
supply,
an
"crowd-out'
expansion
to
altruistic
contributions
The impure
Donors receive public and individual
As government spending increasing, the
altruism theory
advantage
contributions offered by donors do not
from
the
performance
of
donating.
cut back dollar-for-dollar, since the
donors earn the personal advantages
from their contributions.
The output of
Instead of taking the output as public
A
growth
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in
funding
from
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EMERGENCE OF NON-PROFIT ORGANIZATION WITH ITS PROSPECT
the non-profit
good, but creating it as a private good
governmental supply, may not enhance
sector
with specific expanse will let for-profit
the quality of the non-profit supply, but
bodies to rival by releasing a similar
only
product or service into the market.
organization’s
decline
the
non-profit
dependence
on
donations.
The
In more heterogeneous societies, a higher
To financially support a non-profit
heterogeneity
density of non-profit organizations will
organization, there must be an adequate
hypothesis
appear. Since the mixed citizens share
number
more diverse preferences than the average
preferences.
of
people
share
identical
community.
The trust theory
There are possibilities when consumer
The supplies of the true information are
cannot believe for-profit bodies to offer
regarded as a public good provided by
products or service in an acceptable
the non-profit organization
quality or quantity.
3. The results of the research
3.1 Determinants of Nonprofit Sector Density
A Stakeholder Approach by Stijn Van Puyvelde and William A. Brown
This is a comparatively newer research to the Weisbrod’s revisited by Kingma (2016).
The main purpose of their research is to explore the possible answers to the question:
Why do non-profit organizations exist? They go through their investment by using a
stakeholder approach. They deal with some important determents of non-profit sector,
and raise some hypothesis accordingly. In the beginning of the upcoming part, I will
introduce the stakeholder approach from their article, and then give the result of their
research to prove the hypothesis which was initiated by them.
3.2 A stakeholder approach
In the study of non-profit sectors, we are aware of the separation between the demandside and the supply-side stakeholders. The demand-side stakeholders seek goods with
higher quality but lower price, while the supply-side stakeholders fancy the other side
of the coin. This disagreement is intensified by market failure. Likewise, since the
government may also fail to properly satisfy the demand, an apparent need of the
provision by non-profit organization appears. That is the reason why the non-profit
organization exist, because they can deal with the problems inside market better than
for-profit enterprises and governments do.
However, Ben-Ner and Van Hoomissen (1991, p. 522) argue that only when
people from the demand-side sense that the advantage of controlling over non-profit
organization surpasses its cost and, only if the advantage is larger than any other place,
will a non-profit organization be formed.
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To be more specific, they believe the conflict between the demand-side and
supply-side stakeholder does not completely describe the formation of non-profit
sector. There is a possibility for demand-side stakeholders to frame a non-profit
organization when they sense certain advantage from the action. For example, teachers
may agree to build an after school in order to take a better control in the educational
quality. In short, demand for non-profit supply exists for both public goods and private
goods, and only those non-profit organizations which are controlled by demand-side
stakeholders will be able to fulfill this request.
3.3 The hypothesis and the results
On the subject of the results of the hypothesis, I will name the hypothesis proposed by
Stijn Van Puyvelde and William A. Brown (2016), along with the respective
explanations and approval come as following.
First, in the discovery of the relationship between market size and non-profit
sector size, it shows that the county population size has a strong correlation with the
units of public charities in each county. It approves their first hypothesis, which states
that when it comes to public supply, a bigger market size will build a higher density of
non-profit organizations.
Next, the Socio-economic characteristics of stakeholders would be the next key
determinant of non-profit sector density. We had learned earlier that the society was
formed by the demand-side and the supply-side, and this part of the investigation is
operated by taking the demand-side into account. From a demand-side prospect, when
examining the levels of income and education, whether the particular product is a
public good or a private good will make different influences on non-profit sector
density.
When it is a trust good, more advanced levels of income and a superior
education of the demand-side are anticipated to obtain a negative association with the
request for non-profit organizations. For collective goods, on the other hand, it is
proved that the income and education are assuredly related to non-profit demand. This
idea guides us to the approval of their second hypothesis. It says that when it comes to
private goods and services, a society obtains a higher level of income and education,
will occur more non-profit organizations.
In the discussion of the demand heterogeneity, they notice their result does not
fully support their theory in this part. However, they do discover that the higher
poverty rate will impact more positively on non-profit supply of health care, human
services, and arts/culture/humanities. On the other hand, a higher racial diversity can
be positively related to total non-profit sector density and non-profit supply in arts,
culture, and humanities. Stijn Van Puyvelde and William A. Brown (2016, P.1059)
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Furthermore, they find that income disparity resembles a negative effect on the nonprofit supply of educational services, which means that, to a broad range, the
heterogeneous demand for these provisions can literally be given by the for-profit
bodies and the government.
Next, they focus on Social cohesion, which they take the diversity within a
society into consideration. In their original hypothesis, they state that when it comes to
public goods and service, a society featured with a more diverse social cohesion will
have a bigger supply of non-profit organizations. However, this hypothesis is rejected.
The fundamental idea is that there must be members among socially cohesive groups
who share the same preferences, can they find the advantage to financially support nonprofit organizations.
In addition, they examine the character of the government and its impact on nonprofit sector density. They detect confirmation for both the government failure theory
and the interdependence theory. It therefore approves that when it comes to private
goods and services, a society featured with a higher level of government spending on
collective goods will result in a smaller demand for non-profit organizations. Also,
when there is a higher level of public declination to the non-profit organizations, more
non-profit supply will be released, and there will be more non-profit organizations
formed.
They notice that in the departments of the health care and human services, nonprofit supply is directly connected to the performance of the for-profit bodies, when
dealing with the sizes of the for-profit sectors operating in the same industry. This leads
us to think that the competition from for-profit bodies let non-profit organizations work
more efficiently, and therefore offer more non-profit supply. So the seventh hypothesis
is approved. We now know that when it comes to private goods and services, rivalry
from for-profit bodies will create a higher density of non-profit organizations in the
society.
For the last hypothesis, exactly as they expected, they confirmed that the
variations in the density of non-profit organizations can be described by the variations
in their product attributes.
3.4 Summary showed in table
Determinants
Hypothesis
Result
Market size
Hypothesis 1(a) For collective goods and services, a community
Only 1(b) is
with a larger market size will have a smaller demand for non-
approval
profit organizations, resulting in a lower nonprofit sector density,
all else equal.
Hypothesis 1(b) For trust goods and services, a community with
a larger market size will have a larger demand for nonprofit
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organizations, resulting in a higher non-profit sector density, all
else equal.
Socio-economic
Hypothesis 2(a) For collective goods and services, a community
Both
characteristics of
with a higher level of income and education will have a higher
approval
stakeholders
level of non-profit sector density due to the positive demand-side
and supply-side effects, all else equal.
Hypothesis 2(b) For trust goods and services, a community with
a higher level of income and education will only have a higher
level of non-profit sector density if the positive supply-side effect
surpasses the negative demand-side effect, all else equal.
Demand
Hypothesis 3 For collective goods and services, a community
heterogeneity
characterized by a larger demand heterogeneity will have a
Approval
larger demand for nonprofit organizations, resulting in a higher
non-profit sector density, all else equal.
Social cohesion
Hypothesis 4(a) For collective goods and services, a community
Both
characterized by a higher level of horizontal social cohesion will
rejected.
have a larger supply of nonprofit organizations, resulting in a
higher non-profit sector density, all else equal.
Hypothesis 4(b) For trust goods and services, a community
characterized by a higher level of social horizontal cohesion will
have a larger supply of non-profit organizations, resulting in a
higher nonprofit sector density, all else equal.
Government
Hypothesis 5 For collective goods and services, a community
Approval
characterized by a higher level of government expenditures on
collective goods will have a smaller nonprofit demand, resulting
in a lower nonprofit sector density, all else equal.
Level of public
Hypothesis 6(a) For collective goods and services, a community
subsidies to nonprofit
characterized by a higher level of public subsidies to non-profit
organizations
organizations will have a larger nonprofit supply, resulting in a
Approval
higher nonprofit sector density, all else equal.
Hypothesis 6(b) For trust goods and services, a community
characterized by a higher level of public subsidies to non-profit
organizations will have a larger nonprofit supply, resulting in a
higher nonprofit sector density, all else equal.
Size of the for-profit
Hypothesis 7(a) For collective goods and services, competition
sector
from for-profit firms will lead to a higher level of non-profit
Approval
sector density due to the positive supply-side effect, all else
equal.
Hypothesis 7(b) For trust goods and services, competition from
for-profit firms will only lead to a higher level of non-profit
sector density if the positive supply-side effect surpasses the
negative demand-side effect, all else equal.
Density of non-profit
Hypothesis 8 Differences in the density of non-profit subsectors
subsectors
can be explained by differences in their product attributes (non-
Approval
excludability, non-rivalry, and information asymmetry).
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4. The research question: Why do we need new theories?
After analysing two articles about the formation of non-profit sectors from respective
period of time, the research question raised in this article is Why do we need new
theories in the field of non-profit sector’s formation? Although Weissbrod provides a
model of non-profit sector formation about thirty years ago, new theories and
hypotheses, keep popping up along the time. Hence, it is reasonable to assume that the
previous theories provided by Weissbrod were not enough to completely cover the
whole reality. Therefore, to answer this research question, we must first understand
what the differences between the previous and the latest theories are; then to discover
how new theories would make up with the shortness in the previous ones.
4.1 The insufficiency of previous theories
Foremost, to explore the reason why do non-profit organizations exist, researchers had
listed a number of major theories. It is clear that those models based on these theories
approve to the non-profit field in the most of the case. However, as Stijn Van Puyveld
and William A. Brown (2016) show in their investigation, limitations could be found
among those previous theories. They claim that many of the previous studies simply
deal with one sort of non-profit action, or merely inspected a restricted number of
speculative viewpoints. It shows that those determents such as market demand, cultural
diversity, and government capacity are taken into consideration in the previous studies,
when dealing with the formation of non-profit sector.
Nevertheless, those studies do not accordingly make a precise distinction
between the conflicting impacts on those request and supply on the number of nonprofit sector in a society. As a result, Stijn Van Puyveld and William A. Brown (2016)
complete the survey with a more integrative framework to figure out the variations in
non-profit sector density by integrating the aforesaid analytical prospects with one
another.
In contrast to the previous studies, they notice that the demand side and the
supply side function concurrently and that it is challenging to separate them by simply
using a stakeholder approach.
4.2 The importance of experimental data
Another interesting difference between Kingma’s Stijn Van Puyveld and William A.
Brown’s studies is that, by operating real investigation, Stijn Van Puyveld and William
A. Brown receive actual data which could accurately tell the right from wrong of those
hypothesis assumed by the others.
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4.3 The summation of the answer
Ultimately, we need new theories because the old ones may contain limitations as time
passes by, as well as market and society changes. By providing more specific data and
the latest observation in the field, new theories do not subvert the old ones, but simply
compensate the shortages among them. In this sense, those theories provided lately will
not be thoroughly appropriate in a near future. Since the society and market never stop
changing, every theory will definitely contain limitations to the respectively current
situation. It is apparent that there will never be any golden rule or theory could
perfectly describe the formation of non-profit sectors. In other words, we will always
need new theories to meet up to the demand for a better understanding to this everchanging field as time goes by.
5. Discussion
After analysing the two articles, most of the ground rules of the formation of the nonprofit sectors are acquired as following. Fundamentally, non-profit organizations exist
to fulfil the shortages of the demands for public goods which the government fails to
provide. The public goods theory is basically the most important theory to support this
model: this idea provides a reason for people to make donations in order to make the
improvement to the public supply offered by a non-profit organization.
Next, based on the heterogeneity hypothesis, it is apparent that a diverse society
is useful when analyzing the public goods offered by non-profit organizations and local
governments. Again, according to the stakeholder approach, non-profit organizations
can deal with problems that occur inside market in a better way than for-profit bodies
or government would do. Especially when we know that the demand-side stakeholders
will take control over non-profit organizations, this idea makes it easier to convince the
citizens that the demand unsatisfied by government or for-profit bodies will be fulfilled
in the end.
Measuring the non-profit organizations is always a complicated mission. Frankly
speaking, even from the latest research we can see limitations inside it. From an
analytical viewpoint, researchers may gather the real data to support their proposals,
however, the process of obtaining the data could also make difference to the final result,
not only the data itself.
The formations and behaviors of non-profit organizations discussed in these
articles are useful to measure the non-profit sectors. However, more and constant
researches in this field are suggested, since the ever-changing market and society. Other
determinants of investigating the density of non-profit organizations are also
recommended to take into consideration.
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