Competing Non-Profit And For-Profit Firms In The ”Caring Sectors”

In the UK and the United States, over 90% of non-profit firms are found in the ”caring sectors” – social services, health, education and culture. New research by Patrick Francois of Tilburg University, published in March 2003 issue of the Economic Journal, explains why:

When employees care about the level of service provision or its quality, they may be motivated to perform tasks beyond their strict job description. But such care only motivates effort if workers believe it will have an impact. In other words, workers are motivated to go further than strictly required, only when what they does ”matters”.
Since non-profit status means that management is not directly concerned with profit or not answerable to owners with such concerns, it commits management to a form of noninterference and ensures workers” efforts ”matter”.

Non-profit firms can thus motivate their work force in a way that for-profit firms cannot match. Francois” study also establishes how non-profit and for-profit firms will behave in sectors where they co-exist. It predicts that:
Non-profit firms will employ fewer supervisory resources than their for-profit counterparts. Non-profit firms will pay equivalent quality workers more, on average, than for-profit firms. Somewhat paradoxically, non-profit firms will obtain more ”donated labour” effort from their workers than for-profit firms.

A recent National Bureau of Economic Research study uses an extraordinarily detailed data set for US child-care workers to provide what they claim is the first direct test of ”labour donations”. They report that workers in non-profit firms do receive lower wages when they perceive that their work ”matters” but not in for-profit firms, as consistent with the second prediction.

The study also finds, somewhat paradoxically, that non-profit workers of the same experience and characteristics, are paid, on average, higher wages than their for-profit counterparts, as consistent with the third prediction. These results are not likely to be due to idiosyncratic features of the child-care industry, as the raw data show similar patterns across a number of industries.

With the move to increased private provision of previously public tasks, the non-profit sector has grown steadily in most OECD countries over the last 20 years. It is important – in both predicting the direction of future changes and in designing optimal regulation – to have a good theoretical understanding of the advantages provided by the not-for-profit organisational form.

Existing analyses of non-profit firms suggest their advantages arise when the details of service provision and purchase are difficult to pin down in a contract. The idea is that nonprofit status commits a service provider to ”soft incentives”, which protects purchasers, donators or volunteers from expropriation efforts on the provider”s part.
But these analyses cannot adequately explain the observed sectoral breakdown of non-profit firms, particularly their over-representation in ”caring sectors”. Why are non-profits not also widespread in the provision of management, business consultancy or the myriad other business service sectors of the economy where such contracting difficulties, and opportunities for expropriation, are also common?

This study presents an alternative analysis of non-profit firms based on employees” own concern for service provision, which can explain this sectoral breakdown, and which can also reconcile previously puzzling empirical comparisons between non- and for-profit firms.

”Competing Non- and For-profit Firms in Caring Sectors” by Patrick Francois is published in the March 2003 issue of the Economic Journal. Francois is at Tilburg University in the Netherlands.

Patrick Francois

University of British Columbia, the Canadian Institute For Advanced Research and CEPR | pfrancois.ubc@gmail.com