What does non-profit mean?

Not what you think.

Peter Klein over at Organizations and Markets blogged recently about what sound like some really interesting papers on the nature of non-profits. Of course, in a case of the shoemaker’s children, I can’t find these papers to read, without paying some $30 per (or slogging down to the Business branch of the NYPL in the pouring rain, in defiance of my digital lifestyle.) Ever since my soon-to-be-disabused notion that I would be able to read and understand academic research on quantum computing, I have been getting emailed a daily list of papers being published about it from Arxiv.org. You would think, given their line of work, economists would be hip to the efficiency gains from the free flow of information. But no. I wonder who gets that$30 anyway?

So, instead, I’ve been reading Evelyn Brody’s excellent Agents Without Principals: The Economic Convergence of the Non-Profit and For-Profit Organizational Forms (oh, stop telling me how sexy I am, my head will get big.) She makes an interesting, if obvious in retrospect, point towards the beginning: what distinguishes a non-profit is not profitability but distributions. Non-profits are entities that are not allowed to distribute their profits.

Look at this income statement summary from my alma mater, Columbia University. On $2,501 million of FY2005 revenue, there was some$139 million of EBI (no ‘T’ for non-profits.) This, of course, has to be so or there wouldn’t be an endowment of $5,191 million. The endowment, unless they’ve been selling equity on the side, has to be retained earnings, or accumulated profit. (OK, I haven’t taken the rest of the balance sheet into account, but I really doubt that the endowment is the result of piling up liabilities.) An EBIT margin of 5.6% is not great, of course. Apollo Group had roughly the same revenue (in 2006), but$650 million of operating income. So, in comparison, Columbia is a non-profit.

Why is Columbia a non-profit? Certainly not because it’s not trying to make money (I happen to know that they are very eager to make money; I have the mail to prove it.) Some economists have argued that the inability to distribute profits, and thus enrich the capitalists, leads to more trust from customers when they can not judge the quality of the services the organization is providing: being a non-profit is an antidote to information asymmetry.

If this is true–and it isn’t entirely clear that it is–can the information asymmetry be alleviated in some other way, a way that would still allow the organization to be managed by the numbers?

One Comment

1. as my wife told me when she worked at sesame street, “non for profit” does not mean “not for revenue”