The Organization of Social Enterprise: Transacting versus Giving

This paper studies how beneficiary-side information shapes social enterprise. Classic nonprofit theory emphasizes output quality that donors or consumers cannot observe. Here, the problem is the entrepreneur's initial uncertainty about beneficiaries' abilities and needs. Giving reaches more beneficiaries but is likely to be mismatched to their needs. Transactions allow costly measurement and assistance tailored to individual needs. At sufficiently high heterogeneity, transactions align profit with mission, rendering the nonprofit constraint redundant; the entrepreneur then forms a for-profit that attains maximal targeting quality but operates at a limited scale. Certification of beneficiary transactions can facilitate scaling without sacrificing targeting quality.