Not-for-Profit Service that Leads Profit: Delegation and Competition between Not-for-Profit and For-Profit Organizations

Abstract

This study shows that the provision of not-for profit service would not only give not-for-profit organizations (NPOs) a competitive advantage over for-profit organizations (FPOs). Under the separation of control and ownership, we illustrate that once market demand is inelastic, the provision of not-for-profit service serves as a strategic device for the manager of an NPO and thus induces the owner of an NPO to overcompensate his manager regarding the margin of profit. Moreover, as the regulated price of not-for-profit service increases, an NPO could still over-compensate his manager in regard to profit, when the indirect effect on increasing preference difference between the owner and manager of the NPO dominates the direct effect on market price. Thus, an NPO could charge more in for-profit service.