The Transaction Cost Theory of the Nonprofit Firm: Beyond Opportunism

Abstract

Building upon the transaction cost theory of the for-profit firm, the paper argues that the transaction cost-economizing role of the nonprofit firm has two distinct dimensions. One of them consists of reducing the cost of searching for, processing, and communicating information and the other - of minimizing opportunistic behavior by means of aligning incentives of concerned stakeholders. So far, the transaction cost theory of the nonprofit firm has been emphasizing the second dimension, while largely ignoring the first one. The paper fills this gap by demonstrating that nonprofit firms are able to economize on transaction cost not only by minimizing opportunism, but also by facilitating cooperation among those stakeholders who derive utility from contributing to the realization of their nonprofit firms' missions and hence would not be interested in opportunistic behavior. The paper concludes by emphasizing the complementarity of the two dimensions of the nonprofit firm's transaction cost-economizing role.

Keywords: nonprofit firm, transaction cost, information cost, opportunism