45/2011 Kimberley Scharf

We study competition between non-profit providers that supply a collective service through increasing-returns-to-scale technologies under conditions of free entry. When providers adopt a not-for-profit mission, the absence of a residual claimant can impede entry, protecting the position of an inefficient incumbent. Moreover, when providers supply goods that are at least partly public in nature, they may be unable to sustain the adoption of more efficient technologies that feature fixed costs, because buyers (private donors) face individual incentives to divert donations towards charities that adopt inferior, lower-fixed-cost technologies. These incentives may give rise to a technological race to the bottom, where non-profit providers forgo opportunities to exploit scale economies. In these situations, government grants in support of core costs can have a non-neutral effect on entry, technology adoption, and industry performance.

Culture and Development