Profit versus Nonprofit Firms in the Service Sector: A Formal Analysis of the Employment and Welfare Implications

We present a general equilibrium model where manufacturing and service firms coexist. The quality of the service depends on the workers' effort. Two institutional regimes are compared, in which the service-providing firms are for-profit enterprises or, alternatively, nonprofit organizations. The paper shows that the employment level, aggregate income and both the quantity and the quality of the service are higher when the service-providing firms are nonprofit organizations. Moreover, switching from one regime to the other has redistributive effects, and the equilibrium associated with the presence of nonprofit organizations is Pareto-superior if they enjoy a significant advantage at motivating their employees.