Wednesday, July 23, 2008

Teresa Harrison and Christopher Lainez: Entry and Exit in the Nonprofit Sector

Teresa D. Harrison and Christopher A. Lainez recently published Entry and Exit in the Nonprofit Sector in the B.E. Journal of Economic Analysis & Policy.  You can get a free one-time guest pass to download the article at the link above.  In the meantime, here is the abstract:

We study the entry and exit dynamics of nonprofit public charities using 1989-2003 tax return data. The observed patterns can be understood using a dynamic industry model based on Jovanovic (1982) that incorporates profit-deviation and a non-redistribution constraint. Both features generate a high exit threshold which implies high net entry rates and low exit rates. The data reveal that nonprofit gross entry rates are lower than those of for-profits in services, while extremely low exit rates (across both sectors and time) result in net entry rates nearly 3 times larger than that of for-profit firms. We find that the behavior of new public charities is remarkably similar to that found in studies of private firms (e.g. new firms begin smaller than the industry mean, but grow faster). However, exit patterns diverge sharply. Besides relatively low exit rates, the survival rate of new nonprofit firms greatly exceeds those found in studies on services and manufacturing. In addition we find that the hazard rate of exit declines with age and size, and with size conditional on age.

I think the economic jargon means that nonprofits enter the markets at much lower rates than for-profits, presumably comparing nonprofit and for-profits in identical industries, but nonprofits go out of business at much lower rates than for-profits.  I'm always baffled when empiricists spend a whole lotta time proving the axiomatic.  On the other hand, law review editors insist on innumerable citations, even for assertions about the obvious.  This paper should come in handy for most assertions to the effect that "do-gooders aren't in it for the money."


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