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Validation of Nonprofit Organization Behavioral Models and Why It Matters for Public Policy and Mixed Industries

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This dissertation looks at the consequences of three different government regulatory policies---the nondistribution constraint (which prohibits managers of nonprofit organizations from distributing profits generated by the nonprofit organization to themselves), the 100/0, 85/15, and 90/10 rules (which restrict the fraction of revenue for-profit colleges and universities can receive from Title IV sources), and the prohibition of the sale of alcohol intended for consumption during the latter part of the 19th and beginning of the 20th centuries in the United States. More specifically, in each of the papers key issues in the analysis include (1) consequences of imperfect enforcement including the extent of compliance, (2) unintended consequences of the legislation, and (3) the effects of ambiguities inherent in such policies. The first and second chapters are also related because of their implications for the nonprofit sector and mixed industries (markets in which there are both for-profit and nonprofit producers). The second chapter focuses on the responses by FP colleges and universities to a legislation which proscribes the fraction of their total revenue that can come from Title IV (federal student financial aid) sources. Notwithstanding the legislation's scope is strictly FPs, it may still have indirect influences on NP colleges and universities since the market for higher education in the United States is mixed, having both NP and FP suppliers. In other words, because NPs and FPs schools compete with each other, legislation affecting the latter may influence the former in some way. For example, if the introduction of the 85/15 rule caused a price increase resulting in the most capable students substituting away from FPs (in favor of a NP school), how do NPs respond to this increase in demand? Understanding the how and why of NP behavior is important in answering this and similar questions. Exploring the validity of NP behavioral models is the essence of the first chapter in my dissertation. The following three paragraphs summarize each of the three main chapters. Chapter 1: Philanthropy or Filling One's Pocket? Which Nonprofit Model Best Fits the Data and Why it Matters for Public Policy and Mixed Industries. The objective of this research is advancing the understanding of the economic behavior of nonprofit (NP) organizations by identifying one or more models that yield predictions most consistent with empirical findings. In the analysis, I consider numerous alternative NP models previously suggested in the economics literature, categorizable into six distinct types. For each of these six types, I derive implications regarding (1) the effect of an exogenous shock to income on managerial compensation, (2) the effect of an exogenous shock to income on mission-good production, M, and (3) the response to an exogenous change in government oversight in terms of the effect of the income shock on managerial compensation. Using panel data of total manager compensation and program services expenditures from the financial returns (i.e., Form 990 returns) of about 7000 NPs in the human services sector I find (1) an increase of $1000 in government grants causes total managerial compensation to increase by about 8% (in terms of the level effect, a $1 increase in government grants causes total managerial compensation to increase by about 1.4 cents), (2) an increase in government grants by that same amount causes expenditures on M to increase (the estimated increase in program services expenditures is 2%), and (3) the introduction of "intermediate sanctions" causes the effect of government grant receipts on compensation to fall by nearly two-thirds. The results from the three tests performed in this paper are consistent, in each instance, with the Profit-deviating model which is distinguished by a utility function increasing in both the level of manager compensation and M output. These findings are significant because they advance our understanding of (1) sufficient and necessary conditions for the existence of mixed markets (markets with both NP and for-profit (FP) producers), and (2) public policies impacting the NP sector such as limiting the charitable income tax deduction, the existence and size of the unrelated-business income tax, and the subsidization of the NP sector by government through grants and tax-exemptions. Chapter 2: The Effect of Federal Financing Rules on Acceptance and Graduation Rates Among For-Profit Colleges and Universities. The 85/15 rule, which went into effect in the United States in 1995, restricted the percentage of the total revenue earned by for-profit (FP) colleges and universities that could come from federal student financial aid programs (Title IV) to 85% (previously the (implicit) threshold percentage was 100%). In 1998 the threshold was increased to 90%. This paper examines the consequences of this legislation on the behavior of FP schools. Specifically, I examine how the implementation of this law affected FP colleges in terms of (1) their admissions of lower income students, and (2) the graduation rate of their students. Estimating a three period model with linear trend breaks I find that FP schools do admit relatively fewer students with demonstrated financial need in an effort to lower the ratio of Title IV revenue to total revenue in order to comply with a more restrictive threshold, and admit relatively more of this same type of student when the threshold increases. Graduation rates, on the other hand, fall in response to the introduction of the 85/15 in 1995. In addition to furthering the understanding of the social desirability of this policy, this paper contributes to the economic understanding of (1) the relative behavior of institutions of different forms (i.e., FP, private nonprofit, or governmental) operating in mixed markets when each type faces differential constraints, and (2) factors that affect the graduation rate at institutions of higher education across different ownership forms within the United States. Chapter 3: A test of Prohibition's Effect on Alcohol Production and Consumption Using Crop Yields. The effect of alcohol Prohibition in the United States has been the subject of debate and remains an important question to answer as policy makers explore prohibitions of other goods. Due to a lack of data, one question that remains unanswered is the effect Prohibition had on the actual production of alcohol. This paper attempts to answer this question by estimating Prohibition's impact on the yields of various grains which constitute one of the principal inputs in alcohol production. Understanding the impact of Prohibition on crop output plays an important role in parsing out its effect on alcohol production. Using a variety of data sources and exploiting the variation in timing of state prohibition law adoption, we estimate the effect of Prohibition on several measures of crop production. Our preferred identification strategy compares contiguous counties in states with differing prohibition laws. Our findings suggest that state prohibition laws decreased the production of barley and may have increased the production of corn. Using these estimates, we calculate that Prohibition decreased pure alcohol production, and by extension consumption, by at least 117 gallons and as high as 252 gallons per county per year.

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  • 01/10/2019
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