1 Social Capital and Political Theories of the Nonprofit Sector

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

EqualityCivic

associationPolitical

associationDemocracy

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

$140

$320$398

$978

$1,637

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

Agreestrongly

Agree Neither Disagree Disagreestrongly

"The government has a responsibility to reduce income inequality"

Ave

rag

e an

nu

al g

ivin

g

7

Different types of giving

292%

415%

215%

36%

112%

44%

562%

0%

100%

200%

300%

400%

500%

600%

Health

Education

Religion

Social w

elfare

Environm

ent

Arts

International aidPer

cen

tag

e b

y w

hic

h t

ho

se w

ho

dis

agre

e ex

ceed

giv

ing

by

tho

se

wh

o a

re

8

Volunteering

14%

12%

11%

12%

12%

13%

13%

14%

14%

15%

Volunteers

Volunteers for

secular causes

Per

cen

tag

e b

y w

hic

h t

ho

se w

ho

dis

agre

e ex

ceed

vo

lun

teer

by

tho

se w

ho

are

9

It’s not just about money

28%

25%

20%

31%

0%

5%

10%

15%

20%

25%

30%

35%

"The government shouldimprove living standards

for the poor"

"People should takecare of themselves"

Population percentage

Percentage of blood donated

10

But it’s not politics per se

Gives (Probit) Gifts (Tobit) Secular gifts (Tobit)

Constant -1.399** (0.477) [-0.515] -4121.7*** (1097.6) [-1807.3]

-2458.4*** (513.5) [-850.5]

Disagrees with redistribution 0.277** (0.118) [0.102] 599.4** (274.1) [262.8] 280.2** (122.5) [96.9] Secular -0.335** (0.133) [-0.124] -593.9* (337.5) [-260.4] 23.3 (146.5) [8.1]

Religious 0.493*** (0.149) [0.182] 1453.9*** (315.9) [637.5] 75.8 (145.6) [26.2]

Age 0.02*** (0.005) [0.007] 23.8** (11.4) [10.5] 10.3** (5.2) [3.6] Income ($1,000s) 0.008** (0.003) [0.003] 39.6*** (7) [17.4] 18.4*** (3.1) [6.4]

Education (years) 0.0777** (0.0243) [0.0286] 110.87* (56.8) [48.62] 54.74** (25.22) [18.94]

Male 0.011 (0.115) [0.004] -141.4 (271.4) [-62] -60.6 (121.4) [-21] Married 0.077 (0.115) [0.028] 353.2 (268.6) [154.9] 75.3 (120.3) [26] White -0.439 (0.317) [-0.162] -340.4 (683.9) [-149.3] 168 (321.1) [58.1] Black -0.421 (0.361) [-0.155] -404.7 (792.3) [-177.4] 365.8 (366.7) [126.5] Liberal -0.15 (0.161) [-0.055] -367 (386.7) [-160.9] -214.9 (176.5) [-74.3] Conservative -0.047 (0.152) [-0.017] -364.4 (358.7) [-159.8] 67.1 (156.7) [23.2]

11

Some international evidence

12

Outline

• Political theories of nonprofits• Social capital and nonprofit

management• Nonprofit economics

13

Social Capital

Robert PutnamNetworks, 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 individualsSynthesisThe trust and social cohesiveness that promotes giving, volunteering, and

participation in civil societyEvidence 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

Net revenues

Mission adherence

Rmax

Mmax

R*M=0, R=0Net revenues

Mission adherence

Rmax

Mmax

R*M=0, R=0

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 3 2002

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