There are different nonprofit theories which explain the existence of nonprofit organizations such as homeless shelter. Contract failure theory whose major proponent was Henry Hansmann in the year nineteen- eighty, is a distinction of the three-failure theories explaining the existence of nonprofit organizations. Hansmann examined a particular feature of the overall market failure and concentrated on circumstances under which for-profit organizations did not deliver specific products or services owing to the existing competition and to the purchasers’ fear of being deceived. This essay describes contract failure theory and explains the existence of local nonprofit homeless shelter.
Contract Failure Theory
Contract failure is two theories that explain the existence of a local nonprofit homeless shelter and are also the reason for the existence of nonprofits. Contract failure theory presents a state whereby the consumers of goods and services are incapable of assessing their quality and hence motivating the producer to yield a poorer quality of these goods and services. This practice results to unstable optimal economic conditions which eventually lead to the existence of non-profit organizations such as local homeless shelters, even though, under the right circumstances, non-profits are susceptible to contract failure. Usually, non-profit institutions are more reliable since they have business structures that have no provision for deceptive incentives (Powell & Steinberg, 2013).
Delegate your assignment to our experts and they will do the rest.
The most identifiable cause of contract failure that explains the existence of a local nonprofit homeless shelter is referred to as information asymmetry. This is when one side, usually the producer, is well-versed with the goods and services as compared to the other side, usually the consumer. The two sides have unequal knowledge about the products and the services. Jyhan Lee (2012) argues that existence of a local nonprofit homeless shelter can also be explained by three circumstances arising from asymmetric information. The three situations include when the value of goods and services becomes difficult to be evaluated for instance, higher education, taxation or medical care.
The second scenario which explains the existence of a local nonprofit homeless shelter is whereby the ultimate consumers are not able to judge themselves, for example having an elderly relative or friend in a nursing home or a baby daycare. The third case is when the purchaser fails to know whether the product delivered is what was guaranteed due to its failure to reach the purchaser for consumption (Jyhan Lee, 2012). Whenever there is contract failure, a suboptimal provision of public goods occurs resulting to market failure hence another explanation for the existence of the nonprofit homeless shelter.
According to Helmut (2014), nonprofits will intervene and deliver the required goods and services in reaction to contract failure. Once the market hypothetically exploits the three conditions of information asymmetry, nonprofits ought to safeguard the consumer from scheming producers. The challenges of distributing quality goods and services will hinder the delivery of outstanding earnings to the personnel controlling the firm. It excludes individuals who plan to invest in the business from getting the business’ profit for their self-centered interests. The constraint is a distinctive feature of nonprofits that bring about low motivation in the producers in exploiting inexperienced and uninformed consumers (Helmut, 2014).
In terms of benefits, Benson (2011) holds that the nonprofit do not have a reason to deceive the consumer about the value of the product or service provided since members of such organizations only benefits indirectly rather than directly. For this reason, the consumer will find it more convenient to have confidence in a nonprofit organization offering services in comparison to a for-profit organization due to the non-distribution constraint of nonprofit organizations.
References
Benson, P (2011). The Theory of Contract Law: New Essays. Cambridge University Press.
Helmut, K. (2014). A Dictionary of Civil Society, Philanthropy and the Third Sector. New York: Taylor & Francis Publishers.
Jyhan Lee (2012). Non-Profit Organizations and the Intellectual Commons. Washington, DC: Edward Elgar Publishing.
Powell, W. & Steinberg, R. (2013). The nonprofit sector: a research handbook. Yale University Press.
