The Thin Mint Effect

9 November 2010 at 6:58 pm 6 comments

| Peter Klein |

A new study finds that as nonprofit organizations increase their for-profit activities, the share of resources going to the core mission decreases. (Thanks to Fast Company for the link and the Thin Mint reference.)

This strikes me as a good illustration of multitask principal-agent problems. The output of for-profit activities is more easily measured than the output of nonprofit activities, giving agents (under performance-based pay) the incentive to increase effort toward those for-profit activities. Mises’s discussion of performance measurement and delegation  in Bureaucracy comes to mind as well.

Entry filed under: - Klein -, Management Theory, Public Policy / Political Economy, Strategic Management, Theory of the Firm. Tags: .

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6 Comments Add your own

  • 1. Snarky  |  10 November 2010 at 1:58 pm

    This is a really sexy area, but I don’t think this paper does a very good job of making this point. The empirical conclusions reported seem rather weak and unrelated to any theoretical foundation. Of course the proportion of expenditures on NFP-mission as a fraction of total expenses will go down as UBI activities (on an absolute basis) go up; that would be mathematically true no matter what extra activities were pursued, regardless of for-profit status, as long as the extra activities had nonzero expenses. Dividing UBI by an arbitrary constant (total revenue) doesn’t change this tautology.

    Also, I would expect some sort of two-stage estimation procedure; the decision to pursue (or expand) UBI is certainly not independent of either the organization’s financial position or to its cost structure! The beauty of the 1973 econometric method for event studies is that stocks don’t make decisions, so there’s no simulteneity bias. For studying NFP financial performance, however, managers DO make decisions, introducing this bias.

  • 2. Peter Klein  |  10 November 2010 at 3:29 pm

    You certainly earned your nickname today!

  • 3. FC  |  10 November 2010 at 4:27 pm

    I suggest the sale of Thin Mints does more for society at large than the rest of the Girl Scouts activities. They should transition to a for-profit business model focused on the dessert sector.

  • 4. srp  |  11 November 2010 at 7:17 pm

    Tagalongs….mmmmm.

  • 5. Tom  |  12 November 2010 at 11:56 am

    Having only read the Fastcompany story, Snarky’s comment was the first thing that came to my mind.

    “The more they brought in from their businesses, the smaller were their proportion of total expenses spent on programs.”

    No duh. I don’t have to do any statistics to show this.

  • 6. Peter Klein  |  12 November 2010 at 12:03 pm

    I don’t think it’s a duh. The ostensible purpose of the for-profit activities is cross-subsidization. If those free cash flows are plowed back into the core NFP activity, that ratio could easily increase.

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