Abstract:

I develop a model in which a not-for-profit sector arises because altruistic agents care about the consumption of certain goods by other agents. The equilibrium is identical to the solution to the benefactors' utility maximization subject to the beneficiaries' demand, the potential entry of for-profit firms, the production technology and the budget constraint. Therefore, the goal of a not-for-profit reflects the preferences of the benefactor. If the goods produced in the not-for-profit sector are characterized by their quality and quantity, differences in the benefactor's tastes for quality and quantity across these goods result in different effects of donations on prices. The main claim is that the price of quality-intensive goods is more likely to increase or stay constant when donations grow. I analyze the case of symphony orchestras in the U.S. in the period 1988-2005. The evidence is consistent with the benefactors caring significantly about the quality of the service. I also analyze the case of private colleges in the U.S. Since in this not-for-profit industry consumers (students) are inputs in the production process (education), I develop a more complicated model of matching. Students differ in talent and maximize their net wealth. Colleges differ in wealth and maximize their quality, measured by the human capital of their graduates. The model has two predictions: (1)?when a college becomes wealthier it raises tuition, and (2)?when the wealth of all colleges grows at the same rate, tuition increases at every college. The first claim is supported with data from the period 1970-2005 using the number of alumni as an instrumental variable for each college's wealth. The second claim is supported with a data set from the period 1900-2005 using the Dow Jones index as an instrumental variable for colleges' median endowment. The main conclusion is that colleges' wealth must be added to the factors behind the rapid growth in tuition fees over the last twenty-five years discussed in other studies.