ABSTRACT
Social enterprises are able to undertake productive activities when for-profit firms and public agencies are either ineffective or unable to operate. Based on their innovative property rights and forms of governance, social enterprises produce public and quasi-public-i.e. common and collective-goods and services that are meritorious and beneficial for the public. They are typically more efficient, innovative, and productive than public agencies and for-profit firms when market and contract imperfections are prevalent due to asymmetric information (Hansmann 1996), contract incompleteness (Bacchiega and Borzaga 2001, 2003; Borzaga 2003), or high relational intensity in the production of goods (Gui and Sugden 2005). Social enterprises have wide-ranging potential for the development of modern economic systems and encompass activities well beyond the industries traditionally populated by not-for-profit organizations. Social enterprises not only have expanded the supply and range of services in traditional fields of not-for-profit activity such as welfare and social services, but also have been important sources of innovation by creating jobs for disadvantaged workers and by promoting fair trade, microfinance, cultural activities, and environmental protection. In these areas, for-profit firms are in general not effective due to low levels of profitability and the public nature of the services provided. This new productive potential has involved a shift from profit maximization to the satisfaction of social needs (Borzaga and Tortia 2007, 2009), and it has been facilitated by innovative forms of inclusive governance that support the expression of intrinsic and pro-social motivations (Valentinov 2007, 2008). The goal of social enterprises is to produce public benefit goods with a meritorious character. This type of production can be observed in market economies not only by public agencies, but also by private organizations, including at times for-profit firms. Hence, it is not necessarily carried out by organizations that fall within a strict legal definition of social enterprises. It should be noted that even when firms are investor-owned, they may share some important features with the definitions of social enterprises introduced in path-breaking legislation in the UK during 2005 and in Italy during 2006. In these new legal definitions, social enterprises do not pursue profit as their main objective and explicitly identify social aims in their statutes and organizational protocols. In so doing,
they usually seek to reinforce trust relations with all their main patrons, including clients, volunteers, employees, borrowers, and sub-contractors. Social enterprises have similarities with traditional non-profit organizations, but also important differences. They are often understood as entrepreneurial ventures that engage in sustained commercial activity. While commercial activity and its relation to the mission of non-profits is problematic (Weisbrod 1998), social enterprises engage in commercial activities as a matter of course, though these activities must be instrumental for the accomplishment of social aims and conducted in an economically sustainable manner. In other words, economic objectives represent constraints to be satisfied and not final aims to be pursued (see Chapter 1 of this volume). This chapter highlights the welfare effects of social enterprises by examining their impact on employment and output. It begins by identifying three crucial institutional characteristics-objectives, control rights, and governance-of social enterprises. First, the public-benefit objective has important implications for the ability of social enterprises to attract resources, motivate workers and managers, and distribute surpluses not only by means of market exchanges, but also by allocating their products and services under the cost level to weak social groups. Second, the socialization of capital due to the non-profit distribution constraint and to the accumulation of indivisible reserves of capital increases the amount of resources devoted to the social objectives of these enterprises. Third, participatory governance is functional to the accumulation and distribution of socialized resources since it is not designed to pursue the narrow interests of one party, but rather to accommodate the interests of all the parties involved in the venture, including those who are usually marginalized and excluded. Thanks to these features, social enterprises are able to employ non-market inputs like volunteer labour and donations, devote extensive resources to the pursuit of social goals, and satisfy non-paying demand. One claim of this chapter is that the allocative and distributive mechanisms that characterize social enterprises are unique and well adapted to increasing the production of socially beneficial goods and reducing poverty. While these effects have often been downplayed and simply considered positive externalities, this interpretation is unsatisfactory since the most important public benefits of social enterprises are not unintended, but rather stem from deliberate choices and strategies informed by intrinsic, social, and other-regarding motivations. The motivational drivers steering the behaviour of actors inside social enterprises are crucial since these actors do not pursue uniquely private, self-regarding objectives (Valentinov 2007, 2008). Hence, the assumption of purely selfinterested economic agents that can be found in the literature on not-for-profit organizations (Glaeser and Shleifer 2001) needs to be substituted by an empirically and experimentally informed study of the interplay between self-seeking and other-regarding preferences on the one hand and between intrinsic and extrinsic motivations on the other (Ben-Ner and Putterman 1998). Furthermore, conformity and not hierarchy is the main force driving compliance with the objectives of the organization (Grimalda and Sacconi 2005), and a sense of
common identity underpins interactions between the main patrons of the organization (Akerlof and Kranton 2000). For example, the strength of non-selfseeking preferences in not-for-profit organizations can help explain why social entrepreneurs and employees appear less reactive to monetary and extrinsic incentives than workers in public and for-profit firms (Young 1983; James 1983; Rose-Ackerman 1996; Borzaga and Depedri 2005; Borzaga and Tortia 2006). Entrepreneurs, managers, and employees of not-for-profits may enjoy greater self-fulfilment of their intrinsic and pro-social aspirations and prefer nonmonetary incentives, such as better on-the-job relations and increased autonomy. Similarly, financial donations and volunteering are strictly linked to the social aim of the organization. In this context, the accusation of social dumping sometimes made against social enterprises due to their low levels of wages appears misplaced since it does not consider the organizational and motivational specificities that differentiate these enterprises from other organizational forms. Thanks to these specificities, the supply of socially oriented and meritorious goods would decrease together with social welfare in the absence of social enterprises. When worker well-being is considered in a comprehensive way, social enterprises are more effective than public agencies and for-profit employers at improving their employees’ sense of satisfaction and perceptions of fairness (Tortia 2008). The best explanation for this phenomenon is that a social-rather than a profitobjective supports a more integrated and participatory interaction between employees, managers, and the organization as a whole by means of more equitable and transparent procedures. These behavioural predispositions underpin the claim that social enterprises are able to increase the supply of meritorious goods,1 augment employment, and lower prices. These outcomes depend upon a lower exploitation of market power, which entails fixing lower prices and utilizing non-market resources such as voluntary labour. As a result, social enterprises are able to shift the socioeconomic system from Pareto inferior to Pareto superior outcomes by increasing the welfare of beneficiaries and users. This chapter is organized as follows: the next section identifies the features of social enterprises that support their ability to allocate and distribute resources by bypassing market exchanges and helping poor and marginalized social groups. The subsequent sections provide a closer analysis of social enterprises’ allocative and distributive mechanisms and of their impact on output, employment, and welfare. The final section offers concluding remarks and considers policy implications.
