Managerial Economics of Non-Profit Organizations This is the first book of its kind to bring together the microeconomic insights on the functioning of non-profit organizations, complementing the wide range of books on the management of non-profit organizations by focusing instead on both theoretical and empirical work. Jegers begins by considering definitions of non-profit organizations before examining the economic rationale behind their existence, the demand for them and its implications for their functioning. The final chapters look at the economic idiosyncrasies of the non-profit organizations, focusing on the fields of strategic management, marketing, accounting and finance. This book will be perfect for advanced undergraduates and postgraduates engaged in the study of non-profit organizations and managerial economics. Marc Jegers is Professor of Managerial Economics at the Vrije Universiteit Brussel and the Universiteit Antwerpen in Belgium. Routledge studies in the management of voluntary and non-profit organizations Series Editor: Stephen P. Osborne 1 Voluntary Organizations and 7 Social Enterprise Innovation in Public Services At the crossroads of market, Stephen P. Osborne public policies and civil society 2 Accountability and Edited by Marthe Nyssens Effectiveness Evaluation in Non-Profit Organizations 8 The Third Sector in Europe Problems and prospects Prospects and challenges James Cutt and Vic Murray Edited by Stephen P. Osborne 3 Third Sector Policy at the 9 Managerial Economics of Crossroads Non-Profit Organizations An international non-profit Marc Jegers analysis Helmut K. Anheier and Jeremy Also available from Routledge: Kendall The Management of Non- 4 The Emergence of Social Governmental Development Enterprise Organizations Edited by Carlo Borzaga and An introduction Jacques Defourny David Lewis 5 Charity Shops Financial Management in the Retailing, consumption and Voluntary Sector society New challenges Suzanne Horne and Avril Paul Palmer and Adrian Randall Maddrell Strategic Management for 6 The Governance of Public Nonprofit Organizations and Non-Profit Roger Courtney Organisations What do boards do? Edited by Chris Cornforth Managerial Economics of Non-Profit Organizations Marc Jegers First published 2008 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Avenue, New York, NY 10016 This edition published in the Taylor & Francis e-Library, 2008. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” Routledge is an imprint of the Taylor & Francis Group, an Informa business © 2008 Marc Jegers All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Jegers, Marc. Managerial economics of non-profit organizations / Marc Jegers. p. cm.– (Routledge studies in the management of voluntary and non-profit organizations ; 9) Includes bibliographical references and index. ISBN 978-0-415-43382-2 (hbk.) -- ISBN 978-0-203-93084-7 (eb) 1. Nonprofit organizations–Management. 2. Managerial economics. I. Title. HD62.6.J44 2008 658’.048–dc22 2007034552 ISBN 0-203-93084-3 Master e-book ISBN ISBN10: 0–415–43382–7 (hbk) ISBN10: 0–203–93084–3 (ebk) ISBN13: 978–0–415–43382–2 (hbk) ISBN13: 978–0–203–93084–7 (ebk) Contents List of illustrations vi Preface vii Acknowledgements viii List of frequently used symbols ix 1 Introduction 1 2 Defining non-profit organizations 5 3 The demand for non-profit organizations 15 4 Founding a non-profit organization 30 5 Governing and staffing a non-profit organization 37 6 Organizational strategy and behaviour of non-profit organizations 57 7 Marketing in non-profit organizations 67 8 Accounting in non-profit organizations 91 9 Financial management in non-profit organizations 110 10 Gaudium et spes 120 Appendices 122 Bibliography 140 Index 161 Illustrations Figures 2.1 Generic organizational forms 6 2.2 Real organizational forms 7 3.1 Profit organizations and non-profit organizations in the same market 25 4.1 Institutional choice by an entrepreneur-manager 32 4.2 Payoff matrix in a profit–non-profit game 35 8.1 Utility maximizing founder-manager 95 8.2 Accounting and control with an effective board 97 Tables 2.1 International classification of non-profit organizations: main groups and sub-groups 13 5.1 Subscales of Governance Self-Assesment Checklist for non-profit boards 43 9.1 Equity diversity in eight countries, by field (number of countries) 112 9.2 Required rates of return in investment decisions (67 US hospitals, 1989) 116 Preface This book grew out of my yearly updated course text, written in Dutch, which I have been using since 1996 to teach managerial economics of non-profit organizations at the Vrije Universiteit Brussel to last year undergraduate students and first year master students in (applied) economics and business. The yearly updating, being a good example of incrementalism and therefore a not so good example of rational textbook writing, forced me to restructure and rewrite the original text in such a way that, it is hoped, the present book is far more than just a polished translation. Given this background, and the fact that economics are the scientific foundation of the present text (see Chapter 1 for an elaboration on this), its ‘ideal’ reader combines the following characteristics: apart from a genuine interest in the economics of the functioning of non-profit organizations, he/she has a good knowledge of basic microeconomics, knows standard algebra and the traditional mathematical optimization techniques (including the use of Lagrangians), and is acquainted with the essential concepts of management and its most important functional domains, such as strategic management, marketing, accounting and finance. The level of the book remains basic/intermediate, sometimes requiring simplification of the theories presented. An attempt is made to be coherent throughout the book as to the use of symbols, implying that they frequently differ from the symbols used in the papers discussed. In the main text, mathematics is kept to a necessary minimum, with more elaborate proofs having been transferred to the appendices. Finally, without any conscious reason, managers will be female throughout the book, whereas all other persons interacting with them will be male, making the descriptions of these interactions more unambiguous. Acknowledgements Though the writing of a book like this takes place in physical isolation, it would be impossible without a multitude of intellectual, logistic and relational ties. As far as my intellectual indebtedness is concerned, it is only fair to thank everybody who participated with me in researching the functioning of non-profit organizations, making it intellectually possible to produce this book. As it is impossible to rank the contribution of each of them, I present their names alphabetically according to their first names, as these are the names we use, sometimes even forgetting last names: Bruno Heyndels, Carine Smolders, Catherine Schepers, Chris Houtman, Cind Du Bois, Ilse Verschueren, Ralf Caers, Rein De Cooman, Roland Pepermans and Sara De Gieter. Bruno, Cind, Ralf and Roland additionally contributed by commenting on some or all of the drafts of the different chapters of this book. Both of the anonymous referees asked by Routledge to assess the book proposal also made valuable suggestions, most of which were eventually taken into account. In terms of establishing a research network on nonprofit organization management and being enabled to discuss the latest contributions in the field, the biannial workshops organized by the European Institute for Advanced Studies in Management, which I had the pleasure to co-chair with Bernd Helmig, Fabrizio Panozzo, Irvine Lapsley, and Noel Hyndman, were also very important, including the process of co-editing the proceedings. This cooperation very much shaped my thinking on this book’s main topics. Mia Hofman was indispensable when it came to transforming confusing drawings into clear and understandable figures, but even more so as the psychological head of our department, keeping everybody as happy as possible and enabling all of us to concentrate on our research, a role whose importance cannot be overestimated. Finally, I owe most to my parents, Micheline Churlet and Pierre Jegers, without whom it would have been impossible to be where I am now, and my partner in life, Christine Locus, who makes me stay there. List of frequently used symbols Variables u consumer utility u societal utility π outcome s U utility (except societal utility Π profit and consumer utility) a altruism parameter V total variable (production) A administrative costs net of cost fundraising costs w wage b bonus W wealth C cost function (= F + V) x y output in units d discretionary expenses D debt e effort Subscripts and superscripts E(.) expected value operator * optimal value Eq equity a of an agent f fundraising efforts b of a board member F funds raised d of a donor F fixed (production) cost x e of an entrepreneur g ‘warm glow’