Nonprofits
The nonprofit "umbrella" has caused the most confusion of any I study, but nonprofits are important, operating in socially and economically significant industries. I begin by describing a narrow set, nonprofits that form when consumers vertically integrate into production. From this vantage point, I analyze the behavior and performance of other types of nonprofits.
"The Phantom Profits of the Opera: Nonprofit Ownership in the Arts as a Make-Buy Decision" (Journal of Law, Economics and Organization, V17 N2, 2001)
I follow my field advisor Oliver Williamson's advice in selecting an "extreme" case: the performing arts industry is organized exclusively as nonprofits. To understand why, I model the market as consisting of two types, high-paying and low-paying. A firm could sell to both types but would imperfectly charge high types more, having imperfect information about who they are. Alternatively, if high-types could (1) identify each other and (2) organize themselves, they could produce a performance to their exacting standards, charge themselves the correct, high amount, and charge everyone else the correct low amount. The outcome achieves first-best efficiency because high types have perfect information about demand. This vertical integration by consumers constitutes a well-defined subset of nonprofits that is clearly not based on philanthropic motives and that can now serve as standard by which other nonprofits are compared.
"Does It Matter Who Your Buyer Is? The Role of Nonprofit Mission in the Market for Corporate Control of Hospitals" (Journal of Law and Economics, 52:2, May 2009)
Hospitals are owned by a dizzying variety of owner types, including for-profit, nonprofit, religious, and government. With Paul Gertler, I use private data on hospital mergers and acquisitions from an investment bank to study whether nonprofits are less managerially efficient than for-profits. The logic behind our test is that if nonprofits were inefficient, then for-profits would pay a premium based on standard accounting information, knowing that inefficient managers could be replaced to make higher profits. We find that nonprofits are efficient and that they sell at a discount if they are simiar in type, i.e., if their incentives are aligned. In the process, we also show that the market for corporate control is efficient in this largely private market, and that hospitals do not exercise market power.
"Nonprofit Ownership: Insights from Open Source Software" (working paper, 2015)
Why do nonprofits sometimes compete with for-profits? Software is a good place to look at this question because open source software is the type of nonprofit that poses the greatest threat to firms, the type that is organized by users to create nonrival goods for their own use. This "consumer vertical integration into production" arises in predictable places in software space, but goes far beyond software to include phenomena such as Facebook designing routers or Google designing servers for their own use but then making designs openly available.
"Using Foreign Aid Outsourcing to Discern Motives" (working paper, 2013)
Co-author Natalia Martin-Cruz and I use foreign aid data from Spain to understand why a country might donate to other countries. Unlike other studies of foreign aid, we do not assume philanthropic motives and use actual rather than pledged spending and we know if aid was outsourced to an NGO. We modify transaction cost reasoning to argue that countries decide their strategic priorities, then outsource non-strategic activities. We show that Spain's aid prioirites include preventing illegal immigration, a long-term use of soft power whose importance is now appreciated in light of the migrant crisis now gripping Europe--but not Spain.
"Information Asymmetry and Platform Strategy" (working paper, 2016)
The stock market is normally a topic left to the field of finance, but co-author Steve Diamond and I explore this particular "umbrella" to distinguish the NYSE from its competitors. Organized and owned by underwriters, the NYSE subsidized investor trading by efficient stock pricing stocks and orderly trading. This benefited underwriters' clients (listed firms) and profited underwriters, but investors gained, too. By contrast, the Nasdaq was owned by broker-dealers, who profit from investor trades of Nasdaq-listed stocks (smaller, newer firms including tech companies). The incentive difference of owners generated differences in strategy (esp. trading mechanisms) and market outcomes, with orderly pricing at the NYSE and volatility at the Nasdaq. This differentiated market structure changed in 2007 with the SEC's Regulation NMS, so that now, the volatile Nasdaq and similar ECNs dominate trading of all stocks.