1 Social Capital and Political Theories of the Nonprofit Sector

2 Outline Political theories of nonprofits Social capital and nonprofit management Nonprofit economics

3 Political Theories of Voluntary Associations Nonprofits counteract the coercive power of the state Nonprofits are a laboratory for institutions that governments later adopt Nonprofits provide “space” between individuals and states (Locke) Voluntary associations are a force to fragment the proletariat (C. Wright Mills) Ref.: Frumkin (ch 2) 2002

4 Tocqueville’s Model of Voluntary Associations Ref.: Frumkin (ch 2) 2002 Equality Civic association Political association Democracy

5 Links Between Government and Voluntarism Moral suasion (Reagan) Promotion of national service (GHW Bush) Stipended volunteering (Clinton) Faith-based initiatives (GW Bush) Ref.: Frumkin (ch 2) 2002

6 Public subsidies versus private charity

7 Different types of giving

8 Volunteering

9 It’s not just about money

10 But it’s not politics per se

11 Some international evidence

12 Outline Political theories of nonprofits Social capital and nonprofit management Nonprofit economics

13 Social Capital Robert Putnam Networks, norms, and social trust that facillitate coordination and cooperation for mutual benefits Francis Fukuyama An institutional informal norm that promotes cooperation between two or more individuals Synthesis The trust and social cohesiveness that promotes giving, volunteering, and participation in civil society Evidence of social capital is more tangible than social capital itself Ref.: Putnam, Fukuyama

14 Two Types of Ties Foster Social Capital Ties based on homogeneity of identity, demography and sense of purpose Can promote pursuit of narrow interests at the expense of the wider community Ties that span social differences (gender, ethnicity, SES) Build social trust that facilitates cooperation for mutual benefit Bonds Bridges (Putnam, 2000) Ref.: Granovetter (1974)

15 Benefits of Social Capital Less passive reliance on state Proactive citizen intervention into social issues –Schools, crime, economic development Constructive association –Money for charities Lower transaction costs with contracts and laws Fewer public resources needed to govern Amelioration of “excessive individualism” (Tocqueville 1835) Ref.: Putnam, Fukuyama

16 Costs of Social Capital In-group trust means out-group distrust Some social capital is socially destructive Less interchange of ideas between tight-knit groups Less moral suasion not to cheat out-group members Ref.: Fukuyama

17 The Putnam Hypothesis Social capital is falling in America Evidence: lower attendance by many traditional groups (e.g. PTA, bowling leagues, church-related groups) Reasons –Societal cynicism –Female labor force participation –Population mobility and rootlessness –Less marriage, more divorce, fewer kids –Technology—individual consumption of leisure Ref.: Putnam

18 Not Everyone Subscribes to the Putnam Hypothesis Some groups increase membership, others lose—can’t just study the losers Group membership was abnormally high in the American 1950s—can’t measure from that point Ref.: Fukuyama

19 Outline Political theories of nonprofits Social capital and nonprofit management Nonprofit economics

20 Government Failure Theory Public goods: beneficiaries have no incentive to pay, so goods are underprovided So why not government provision? –Political inviability –Constitutionality (religion) –Efficiency: Government does not have the same incentives to minimize costs as NPOs –Donors don’t give to public agencies –Governemnt is often too “blunt” for small- scale provision Ref. Weisbrod

21 Contract Failure Theory Information Asymmetries: both parties to a transaction are not equally well-informed When the stakes are too high for one mistake (e.g. medical care), we may prefer firms with “no profit motive.” –Why? Does non-distribution constraint enhance integrity? –Nondistribution might also hurt efficiency Ref. Hansmann

22 Third-Party Government Theory Government voluntarily devolves responsibilities to the third sector –or Nonprofit sector proactively provides services when they are insufficient at the government level Ref. Salamon

23 Possible Nonprofit Management Objectives For-profits are assumed to maximize profit Possible nonprofit objectives –Service –Budget –Other (e.g. quality) –Mixed –Ambiguous or changing –None

24 The Double Bottom Line Regardless of mission, nonprofits must pay attention to revenues

25 Donor Objectives Altruism –Evident in experimental data Public goods provision (for self or friends) “Warm glow” from giving Personal sense of duty –Religious reasons –Nonreligious reasons Social pressure –Noblesse oblige –Giving at least as much as others Social prestige –Philanthropy as a signal Ref. Rose-Ackerman

26 Danger 1: Unpriced Resources Donated goods: Use has opportunity cost –Typical examples: computers, physical plant –Use shadow prices (what item would cost if purchased) in accounting Volunteer labor –Ill-use leads to Inefficiency (squandering volunteer’s expertise) Attrition (volunteers know their opportunity cost, even if managers don’t) –Use shadow wages (what volunteer would cost if hired) in planning Ref. Young and Steinberg

27 Calculating Shadow Wages Alternatives –Shadow wage unique to each volunteer (small volunteer force) –Shadow wage  average wage (large force) Other considerations –Leisure value –Next-best volunteer opportunity –Benefits to the volunteer (education, free services, etc.) –Cost of volunteer administration Ref. Young and Steinberg

28 Danger 2: Misbudgeted Resources Costs carried by other parts of NPO, or by government –Examples: Subsidized labor, subsidized postage Costs shifted to consumers –Example: Home health care Result: If apparent MC < true MC, then resource will be overused. (Why?) Ref. Young and Steinberg

29 Danger 3: Sunk Costs Sunk costs are unrecoverable –Example: employee training after the fact Sunk costs should be ignored to maximize net benefits (or minimize net losses) –Example implication: Don’t carry an unproductive employee just because s/he was expensive to train

30 Pricing Strategies: For-profits Competitive firms –P=MC (marginal cost pricing) –Price is bid down to unit-cost levels –Profit=0 Non-competitive firms –P is set where MC=MR (equimarginal pricing) –Price is set so that profit is maximized

31 Pricing Strategies: Nonprofits Usually, competition is limited Pricing schemes –MC=MR (monopolistic pricing) –P<MC for favored activities or favored clients Cross-subsidization from other activities, donations, or governemnt subsidies –Price discrimination Classical price discrimination: clients are charged according to characteristics (e.g. kids free) Voluntary price discrimination: P<MC to induce donations (e.g. voluntary payment) Intertemporal price discrimination: Price depends on day or time (e.g. weekdays free admission) to induce participation

32 Competition with the For-profit Sector Where is competition? –Areas of main competition: health, education –Less competition: Social service, environment UBIT restricts competition in the U.S. Competition may drive NPOs to suboptimally-high levels of unfavored-good production –NPOs lose “core mission” Ref. Rose-Ackerman 1996

33 Who Has the Edge? Nonprofit advantages –Tax benefits –Trust because of non-distribution For-profit advantages –Technology –Sufficient financing and staffing –High-profile expertise –Political lobbying capacity Nonprofit managers must trade on these Ref. Frumkin ch

34 Competition Among Nonprofits Competition for what? –Members/clients –Donors/volunteers/donations –Inventory (e.g. books, art works, etc.) Competition with whom? –Other NPOs –For-profits –Governments Identifying competition –Similarity of prizes (management perspective) –Similarity of services (client/donor perspective) –Common competitor: inaction (e.g. no medical care)

35 Nonprofit Commercialization Reasons –Increasing competition with for-profits –Increasing competition with other nonprofits –Growing reliance on donations and earned income –Corporate partnerships –Demand for accountability –Nonprofit culture becoming more “corporate” Risks –Loss of core mission –Decreased attention to need, more on botom line Ref. Salamon & Young 2002