The Organization of Social Enterprise

Nonprofit theory falls short in accounting for the information asymmetries relating to beneficiaries' abilities and needs. This paper introduces a model where entrepreneurs receiving donations choose (1) the for-profit or nonprofit form, and (2) giving to the beneficiaries (e.g., training programs) or forming social enterprises that transact with them (e.g., work-integration). When beneficiaries' abilities greatly vary, entrepreneurs form social enterprises to measure abilities and tailor higher-quality disbursals to their needs. High variance in abilities and entrepreneurs' strong preference for quality lead firms to solely transact with beneficiaries, equalizing the quality of philanthropy between for-profits and nonprofits. However, when entrepreneurs engage in some giving, nonprofits provide higher-quality philanthropy but at lower scale than for-profits. Without tax incentives, entrepreneurs opt for for-profits even when nonprofits provide higher quality philanthropy. Tax deductions, if too large, might lower quality by promoting ineffective giving. Policies that enable entrepreneurs to credibly commit to transacting increase quality.