In this chapter, we explore why donations are made to nonprofit organizations instead of other institutions or directly to recipients; how such nonprofit organizations behave; and what is the appropriate public policy toward subsidizing and regulating these entities. We focus on donative nonprofits--organizations precluded from distributing their surplus revenues to those in control that receive resources in the forms of donated time and money and tend to provide private pure, distributional, or excludable public goods. First, we discuss the definition of a private nonprofit organization and delineate some immediate corollaries and consequences of that definition. Next, we summarize the dimensions of the nonprofit sector--size, scope, and revenue mix--for various countries around the world. Third, we discuss various models of the role and behavior of donative nonprofit organizations. Finally, we discuss some specific behaviors of nonprofit organizations--the ways in which they conduct fundraising campaigns, set prices, employ labor, and use capital. The discussion of models of donative nonprofits forms the heart of our paper, and is organized as follows. First, we show that agency problems between donors (as principals) and charitable service-providing organizations (as agents) result whenever the latter are employed to provide public goods. If the organization is constrained against the distribution of profits, this agency problem is resolved. Second, we argue that a three-stage game is the most natural way to model the choices of intermediaries and donors. In this game, an intermediary makes a seed donation, collects donations from others, then can add to (but not subtract from) the total donated in previous stages. Third, we detail the choice the founding entrepreneur makes between organizing as a nonprofit or a for-profit organization, showing that it can be individually rational for the entrepreneur to constrain his future ability to distribute profits. Fourth, we show how commercial activities alter entrepreneurial decisions. Fifth, we discuss nonprofits that provide excludable public goods, such as those in the arts. Sixth, we discuss sorting of entrepreneurial types across sectors and industries. Seventh, we consider multiple public goods, which may be provided by a single or separate organizations, and the passthrough intermediaries that may support them. Eighth, we delineate a variety of internal agency problems and the ways in which nonprofit organizations cope with them. The final subsection looks at models of long-run equilibrium.
