The Organization of Social Enterprise

Nonprofit theory falls short in accounting for the information asymmetries relating to beneficiaries' abilities and needs. This paper introduces a model where entrepreneurs receiving donations choose (1) the for-profit or nonprofit form, and (2) giving to the beneficiaries (e.g., training programs) or forming social enterprises that transact with them (e.g., work-integration). When beneficiaries' abilities greatly vary, entrepreneurs form social enterprises to measure abilities and tailor higher-quality disbursals to their needs. High variance in abilities and entrepreneurs' strong preference for quality lead firms to solely transact with beneficiaries, equalizing the quality of philanthropy between for-profits and nonprofits. Contrary to common wisdom, entrepreneurs opt for for-profits primarily when donors' regard for quality is highest. Certifications verifying that for-profit firms transact directly with beneficiaries ensure maximum quality of philanthropy, even when quality itself is not verifiable.