Rewarding performance that is hard to measure: the private nonprofit sector

The private nonprofit form of institutions is large and growing. Its role in a mixed economy is the subject of this article. Nonprofits differ from private enterprises primarily in the constraints on them. The key element is that nonprofits may not distribute profits to anyone associated with the organization, a restriction that is in sharp contrast to the freedom that private firms have to reward owners and managers for generating profit. The theoretical case that such a constraint can be useful when consumers are poorly informed is examined. Also, the available empirical evidence on differences in behavior between nonprofit and for-profit organizations is presented.