ABSTRACT
The main economic theories of nonprofi t organizations – based on government failure (Weisbrod, 1977) and market failure (Hansmann, 1980; Ben-Ner & Van Hoomissen, 1994) – explain why they rather than for-profi t or public organizations produce certain goods and services. Economic theory essentially defi nes the voluntary organization as a nonprofi t organization, based on the fact that it cannot distribute any profi t. This characteristic of nonprofi t organizations is referred to as the non-distribution constraint. However, as noted by contributors to the fi eld (Ben-Ner & Gui, 2003; Ortmann & Schlesinger, 2003; Steinberg, 2006), the non-distribution constraint neither guarantees trustworthiness nor is it suffi cient to characterize voluntary organizations. Ortmann & Schlesinger (2003) have devised three challenges – incentive compatibility, adulteration and reputational ubiquity – to be met by proponents of the non-distribution constraint in order to demonstrate that the non-distribution constraint is suffi cient to guarantee voluntary organizations’ trustworthiness. The incentive compatibility condition implies that various forms of opportunistic behavior and misappropriation are effectively constrained by the non-distribution constraint. The adulteration condition requires that the non-distribution constraint is suffi cient to avoid goal displacement, whereas the reputational ubiquity challenge requires them to explain why reputation works in the case of the non-distribution constraint but not for for-profi t providers.
