Internal Organization and Governance

We bring the theory of the for-profit firm to bear on the economics of nonprofit organization by re-examining the literature on the delineation of organizational boundaries and the determination of cost-effective governance mechanisms. This is enabled by explicit consideration of nonprofit firms’ mission orientation as nonprofits engage in activities that may be related or unrelated to their core missions. Decisions on both organizational boundaries and governance are made differently for these two activity types. Based on the re-examination of governance in nonprofits, in the second part of the chapter, we propose a new framework of analysis in which market, hierarchy and collective action represent the three fundamental coordination mechanisms that define the space of entrepreneurial action. While nonprofits do not exclude market and hierarchy to achieve coordination, they represent the organizational form nearest to collective action as dominant coordination mechanism.