DP8606 Scale Economies in Nonprofit Provision, Technology Adoption and Entry

Author(s): Kimberley Ann Scharf

Publication Date: October 2011

Keyword(s): not-for-profit organizations , entry , core funding

JEL(s): L1 , L3

Programme Areas: Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP8606.asp.asp

We study competition between nonprofit providers supplying a collective service through increasing-returns-to-scale technologies. When providers adopt a not-for-profit mission, the absence of a residual claimant can impede entry, pro- tecting the position of an inefficient incumbent. Moreover, when the goods provided are at least partly public in nature, buyers face individual incentives to divert donations towards providers that adopt low-fixed cost technologies, and so providers may forgo the adoption of more efficient technologies that require fixed costs. In these situations, government grants in support of core costs can have a non-neutral effect on entry, technology adoption, and industry performance.