Grant-funded Project Nr. 457/2004/A-EK/CERGE Final Report
Project title:
Nonprofit entrepreneurs and weak enforcement of nondistribution constraint
Research leader:
Mgr. Petra Brhlíková, M.A. 2000
Co-researcher:
Andreas Ortmann Ph.D.
Period of project:
2004-2004
Overall grant:
63 000 CZK
Project Results
The goal of the project was to analyze the consequences of weak enforcement of the non-distribution constraint on the evolution of the nonprofit sector. The empirical part (http://home.cerge-ei.cz/brhlikova/npos/DPBrhlikova.pdf) is focused on the evolution of the Czech nonprofit sector in the late 1990s. In the theoretical part (http://home.cerge-ei.cz/brhlikova/weakenforcement.pdf), which was motivated by the empirical part, we analyzed consequences of the weak enforcement of the non-distribution constraint on the entrepreneurial choice between nonprofit and for-profit ownership form.
Empirical findings confirm, that the Czech nonprofit sector is still smaller regarding the size and also economic and social importance than nonprofit sectors in developed countries. The Czech nonprofit sector remains dominated by organizations focusing on art and culture, recreation and sport activities. In terms of expenses, labor force, and number of nonprofit institutions the Czech nonprofit sector is still growing although at a smaller rate. Major capital investments were done in 1998 and 1999. The evolution of legislation for nonprofit institutions lagged behind the fast increase in the number of institutions and changes were done mostly in reactive manner in order to solve problems that could not be ignored any longer. For instance, a new Act on foundations and foundation founds that imposed a stricter regulation of foundations eliminated so called ‘for-profits in disguise’ from the sector.
The theoretical part of the project consists of two models. With the first model (monopoly) we study the conditions under which it is rational for a representative entrepreneur to start a nonprofit firm. With the second model we study the entrepreneurial choice between nonprofit and for-profit ownership form under an assumption that two firms coexist in the market (duopoly). In both models we consider weak enforcement of the non-distribution constraint and we find that the nonprofit sector becomes unequivocally more attractive for entrepreneurs. With the weak enforcement the quality of products delivered by the nonprofit firm decreases although it still exceeds the quality of the for-profit product. The nonprofit firm charges a higher price than the for-profit firm. In duopoly case the level of enforcement affects the structure of the duopoly. With a weak enforcement the probability of a nonprofit duopoly (two nonprofits in the market) is the highest, with a moderate enforcement the probability of a mixed duopoly (one nonprofit and one for-profit firm) is the highest, and with a strict enforcement the for-profit duopoly (two for-profits) becomes the most probable.