In many industries, such as higher education, hospitals,
and museums, nonprofit organizations control great wealth. Public
and private donations, tax subsidies, and volunteered services have
typically made that wealth accumulation possible. In return for
the various forms of assistance, nonprofits are subject to the "nondistribution
constraint"-- the restriction that profits or accumulated surplus,
which are not limited, may not be paid to any officer or trustee
of the organization, but may be used only to purchase inputs for
the organization's tax-exempt purpose. If a nonprofit converts to
a for-profit form, however, that constraint disappears. The challenge
for public policy is to determine the conditions under which a conversion
would be socially desirable and then structure a conversion so that
it does not lead to enrichment of the officers or trustees. This
paper shows the nature of the issues involved in establishing efficient
public policy toward conversions and enforcing it. Determining the
true value of the nonprofit's assets is shown to be a key issue.
Other issues involve structuring the conversion contract so as to
account for the public services that the nonprofit is providing
-- socially desirable but privately unprofitable -- and the use
of the funds paid, ordinarily to another nonprofit organization,
by the purchaser. The reasons for conversions being essentially
limited to the hospital and HMO industries are examined, as are
the conditions under which pressures for conversions in other industries,
such as universities, would develop.
John H. Goddeeris, Department
of Economics, Michigan State University Burton A. Weisbrod, Department of Economics, Northwestern
University
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