This paper addresses the behavior of nonprofit organizations
in their money-generating activities. It presents a two-good model
in which commercial activities are undertaken for the sole purpose
of raising revenue for use in maximizing the organization’s
mission output. We test two implications of this model for six
industries, including higher education and hospitals. Among the
key findings: (1) Nonprofit organizations in different industries
engage in systematically different unrelated business (UB) activities,
selecting those for which cost complementarities with mission
activities are greatest, and which, therefore, are more likely
to be truly profitable; and (2) the joint costs are allocated,
subject to Generally Accepted Accounting Practices constraints,
between the taxed, UB activities and the untaxed, mission activities
so as to minimize tax liabilities and thereby maximize real after-tax
profit. In the process of testing, we shed light on the finding
that half or more of all the nonprofit organizations engaging
in unrelated business activity report no profit or, more often,
a loss, even though the pursuit of profit is the only apparent
rationale for engaging in it. We conclude that this two-good model
of nonprofit sector behavior, in which nonprofits act like profit-maximizers
in their revenue-generating activities, is consistent with a number
of types of observed behavior
Maxim Sinitsyn,
Doctoral student, Department of Economics, Northwestern
University
Burton A. Weisbrod, Department of Economics, Northwestern
University
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