On the Limits of Nonprofit Firms

Field: Economics, Econometrics and Finance (Social Sciences)

DescriptionThis thesis consists of two papers. The first gives a game-theoretical treatment of the institutional homogenization of value-oriented firms. It explains why intrinsically motivated, value-oriented firms like non-profits may become similar to for-profit firms in terms of organization and norms. It highlights and explains the pairs: value-oriented and flat organizations in contrast to value-neutral managers and hierarchical organizations. We consider a major donor like the government who delegates a project to an organization without endowments under asymmetric information. The non-profit is able to adapt its organization by establishing a hierarchy with an intrinsically motivated manager. The donor can in turn react by employing institutions in order to cope with information asymmetries regarding the mission of the organization and the unverifiable values of the manager. Two main cases are examined, one without competition and a competitive case. The equilibrium in the first case is a flat organization or alternatively highly altruistic hierarchy. The second competitive case is characterized by a value-neutral hierarchy.Surveillance, hierarchy and bureaucracy emerges as a consequence of strategic interaction e.g. local competition over one source. Wealthy or ‘small’ organizations can afford idealism and an egalitarian structure. Such organizations are free to choose the management which best suits their needs or even work in a completely flat organization if they want to. Such solipsism is however not attainable in all environments.Organization and culture adapt to socioeconomic constraints. When competition is fierce, the 'ethics of neutrality' is in line with the aims of finance/power – perceived diversity and radicalism is reduced to symbolic deviations which do not challenge status quo.Please note that in contrast, global competition between systems emerges if additional sources of power/finance are introduced, these may promote different values. Once local equilibrium is established the simplest cases of global competition become obvious – it is just a matter of counting organizations and sources.Please note that technical jargon is used which may not correspond to the everyday sense of the words. E.g. verifiability and altruism are terms which concern what is contractible or relate to what is defined in the literature. Bonuses and reimbursements are expressions of solutions to the underlying tensions – these may be thought of as intangibles as well. My report of how such details relate to previous literature should primarily be seen as means to convey information of how effects may remain invariant even when the structure of the arguments is altered, not specific applications.It is easy to tinker with parameters to model specific situations, especially regarding different modes of reimbursement, wasteful behavior or perks. Because such considerations are theoretically trivial/mainstream (e.g. w.r.t. delegation problem), they are abstracted from in order to emphasize the emergence of bureaucracy or inefficiency (depending on the point of view) as the result of interaction. Similarly, assumptions should not be taken literally. For example: Just because I argue that organizations/workers behave as if they do not move, it does not follow that we should believe they cannot – It is however arguably very interesting if the result still is as if they do not. Nevertheless, there are quite obvious intuitions to be invoked in this case: For instance, researchers may be thought to compete for the same hierarchy of journals, which radically diminishes the importance of geographical distance. (See the Cambridge Conspiracy)What if economic theory is applied to ourselves (e.g. economists)? What kind of economic output should we expect according to economic theory? How is the production of knowledge and the organizational structure related? This thought experiment gives a game-theoretical treatment of such questions. Its insights carry over to a more general set of institutions under limited liability, and could in principle be employed to discuss media, environmental non-profits, human rights organizations, foreign aid etc. with minor modifications. If the non-profit sector fails altruism or its grass-roots stakeholders when confronted with powerful interests, it stands to reason that other sectors will face similar difficulties or worse. Please forgive the typos involving old notation. If you see them, you probably understand anyway. Paper 2Economists have been puzzled over the fact that most schools are public. For instance, in his ‘fixture of graduate programs in economics’, Macroeconomic Analysis, the famous economist Varian (1992) insists that education is a schoolbook example of an ‘inherently private good’. According to him, it is treated as a public one for political reasons. (Varian, p.414)However, I argue that if one departs from basic facts of what constitutes an education, it becomes immediately obvious that externalities and thus market failure is at the heart of the really-existing education systems. Profit oriented ones especially. The bare-bones framework of this paper essentially relies on a few natural assumptions: Knowledge accumulates, i.e. it is based on previous insights; the relationship between a tutor and a student is relativistic in terms of their (costly) contributions to the accumulation of knowledge; and decisions today may be based on future prospects.In Economics, the remedy to externalities in an environment of private firms, and in the grey areas of public-private partnerships, comes from the Nobel laureate Oliver Hart. From a list of stylized facts, the most crucial were selected and reconciled with his work on contract theory to improve on the details. The resulting framework is then shown to be qualitatively consistent with the whole set of observations, and thus an acceptable minimalist theory of the education system from a contract-economics perspective. It is moreover consistent with pedagogical perspectives and intuition unknown to me at the outset. However, the main result is that these uncontroversial facts are not simultaneously consistent with a contract which can meaningfully optimize production. Socioeconomic reality and opportunistic behavior overwhelms such attempts.Thus, the literature drawing upon Hart’s work up to that point is confronted with formidable challenges in education settings as well. In view of this, the neoclassical stance seems out of touch with even modest attempts to describe reality. The mainstream link between effort and personal characteristics, such as ability, exists only as a special case in a decision embedded in a richer set of socioeconomic relations. The finesse of this thought experiment is to be found in what a still-life modeler would see as a weakness – namely its simplicity, and adherence to standard assumptions regarding functional form. Human-capital formation is treated as a game of strategic interaction between a citizen and the educational system consisting of two separate stages which correspond to elementary and higher education. The product of the interaction is human capital and the equilibrium outcome at the first stage affects the student’s productivity at the second stage of higher education. This research shows how the intertemporal nature of learning opens up for opportunism between elementary and higher education and limits the scope of using non-profits against cost-savings in the presence of for-profit firms. The character of relevant school reform will in general depend on the impact of changes at the structural level relative to the impact of reform aimed at the interpersonal level within the classroom domain. The analysis suggests that pedagogical orientation and the pupil’s aim or predisposition to be forward looking, are important determinants of learning outcomes. We show that what happens between the classroom walls is decisive for how the human capital stock is affected in different contractual settings.For more info about the author, please visithttps://manneecheverria.wordpress.com/