Chapter 4: Current nonprofit organization theories and their applications
The heterogeneous nature of the nonprofit sector has greatly complicated the work of theorists who seek to model the origins and the behavior of NPOs. In this chapter, I introduce two principal NPO theories–the contract failure theory and the government and market failure theory–both of which suggest that NPOs are a private response to certain failures in society. These theories highlight NPOs’ social value, which rests on their particular failure-correcting devices. By applying both theories to the commons context, I will test their strengths and weaknesses. Although I seek to expose some gaps in both theories, I do not reject their central insights, which are necessary tools to understand NPOs’ role in the commons discourse. The ‘contract failure theory,’ first proposed by Professor Henry Hansmann, is built around the central concept that the monitoring that occurs naturally in a normal market, in which buyers pay when the suppliers perform acceptably, cannot discipline the supplier of certain goods or services. As a result, when consumers are under-informed in relation to the suppliers, the proprietary sector tends to perform badly. In other words, the basic hypothesis of contract failure theory is that poorlyinformed consumers are unlikely to find proprietary firms supplying higher quality when low quality can be sold at the same price. Contract failure, which is a particular type of market failure, occurs in venues in which services are difficult to evaluate.
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