Henry Hansmann

Nonprofit Enterprise in the Performing Arts

This article explores the reasons for the current dominance of the nonprofit form in the high-culture performing arts, and concludes that this development is a response to the need for price discrimination in that sector. The article develops a model of a nonprofit performing arts organization based on this analysis, and employs the model to explore, first, the consequences to be expected if such an organization adopts any of the various plausible objective functions, and second, the circumstances in which subsidies to such an organization are justified and the way in which such subsidies should be structured.

Toward Unlimited Shareholder Liability for Corporate Torts

Limited liability in tort has been the prevailing rule for corporations in the United States, as elsewhere, for more than a century. This rule is generally acknowledged to create incentives for excessive risk-taking by permitting corporations to avoid the full costs of their activities. Nevertheless, these incentives are conventionally assumed to be the price of securing efficient capital financing for corporations. Although several authors have recently proposed curtailing limited liability for certain classes of tort claims or for certain types of corporations in order to control its worst abuses, even the most

The Economics and Ethics of Markets for Human Organs

In 1984, federal legislation outlawing payment for human organs for transplantation was adopted after only cursory discussion of the underlying policy issues. More considered analysis suggests that this prohibition may be overly broad. It appears possible to design suitably regulated market-type approaches to the acquisition and allocation of cadaveric organs (and perhaps of organs from living donors as well) that will be neither unduly offensive to ethical sensibilities nor easily abused and that may yield significant improvements over the existing system of organ procurement, which presents important ethical and practical problems of its own. Moreover, whatever ultimate judgment we reach concerning the merits of markets for transplantable organs, analysis of the sources of the initial moral resistance to the commercialization that lies behind measures such as the 1984 legislation offers insights into the respective roles of market and nonmarket institutions in general.

When Does Worker Ownership Work? ESOPs, Law Firms, Codetermination, and Economic Democracy

t Professor of Law, Yale Law School. A preliminary effort at exploring the issues discussed in this article appears in an essay entitled The Viability of Worker Ownership: An Economic Perspective on the Political Structure of the Finn, which was prepared for a conference on The Firm as a Nexus of Treaties at the Swedish Collegium for Advanced Study in the Social Sciences, Uppsala, Sweden, June 6-8, 1988, and appears in a conference volume, THE FIRM AS A NExus OF TREATIES (M. Aoki, B. Gustafsson & 0. Williamson eds. 1990). I am grateful to the participants in that conference for helpful comments, and to many other individuals as well, including in particular Bruce Ackerman, David Ellerman, Harold Demsetz, Derek Jones, John Langbein, Jonathan Macey, Thomas Palay, Roberta Romano, Corey Rosen, Alan Schwartz, William Simon, and Paul Starr.

The Rationale for Exempting Nonprofit Organizations from Corporate Income Taxation

Although most types of nonprofit corporations have been exempted from the federal corporate income tax since that tax was first adopted,1 we continue to lack a clear rationale for the exemption. This was perhaps understandable and acceptable when the nonprofit sector was small and nonprofit organizations were engaged largely in activities of a traditionally charitable nature. Today, however, the nonprofit sector represents a substantial and growing share of the national economy. 2 Large concentrations of nonprofits can be found in a number of vital and expanding service industries, including education, health care, research, the media, and the arts. Nonprofit firms now commonly provide goods and services in direct competition with profit-seeking firms, and in many cases increasingly resemble their for-profit competitors in their manner of organization and operation. The traditional criteria for applying the exemption are, as a result, being stretched beyond recognition, so that the absence of an underlying rationale for those criteria, and indeed for the exemption in general, is becoming increasingly conspicuous. To be sure, various efforts to

Property, Contract, and Verification: The Numerus Clausus Problem and the Divisibility of Rights

Abstract The law of every jurisdiction defines a set of well‐recognized forms that property rights can take and restricts the creation of property rights that deviate from those forms. We argue that these restrictions serve not to standardize rights as others have argued but rather to aid verification of the ownership of rights offered for conveyance. We explore the feasible verification rules for property rights and illustrate the relationship between those rules and the structure of rights they support in the principal fields of property, including use rights to real and personal property, security interests, legal entities, and intellectual property. We offer a simple calculus for assessing the efficiency of alternative property rights regimes. We define clearly the difference between property rights and contract rights, clarify the connection between property rights and property rules, and illuminate the limits on specific performance as a contract remedy.

Ownership Form and Trapped Capital in the Hospital Industry

Over the past 20 years, demand for acute care hospital services has declined more rapidly than has hospital capacity. This paper investigates the extent to which the preponderance of the nonprofit form in this industry might account for this phenomenon. We test whether rates of exit from the hospital industry differ significantly across the different forms of ownership, and especially whether secular nonprofit hospitals reduce capacity more slowly than do other types of hospitals. We estimate the effect of population changes (a proxy for changes in demand) at the zip-code level between 1985 and 1994 on changes in the capacity of for-profit, secular nonprofit, religious nonprofit, and public hospitals over the same period, holding constant metropolitan statistical area (MSA) fixed effects and other 1985 baseline characteristics of residential zip codes. We find that for-profit hospitals are the most responsive to reductions in demand, followed in turn by public and religiously affiliated nonprofit hospitals, while secular nonprofits are distinctly the least responsive of the four ownership types.

Organizational Law as Asset Partitioning

Abstract Organizational law – comprising the bodies of law that govern standard legal entities such as business corporations, partnerships, cooperatives, nonprofit organizations, trusts, limited liability companies, and marriages – serves many functions of an essentially contractual character. These contractual functions – which include most matters involving the allocation of authority and earnings among the participants in the firm – could, however, be performed relatively easily by private contracting even in the absence of organizational law. A far more important function of organizational law, we argue, is its role in partitioning property rights between creditors of a firm and creditors of the firms owners and managers. In particular, organizational law plays a crucial role in permitting the formation of a separate pool of assets that can be pledged to bond the contracts of which the firm is the nexus. While the laws role in partitioning off these bonding assets is seldom remarked, it is far more significant than the better-studied rule of limited liability that characterizes many, but not all, legal entities.

Condominium and Cooperative Housing: Transactional Efficiency, Tax Subsidies, and Tenure Choice

TWENTY-FIVE years ago, cooperative apartment buildings were uncommon in the United States, and condominiums were virtually nonexistent. Since then, however, both forms, and particularly condominiums, have spread rapidly through the real estate market. This article explores the factors responsible for this development. In the process, it also assesses the relative transactional efficiency of consumer ownership and investor ownership in multiunit housing. I argue that two factors appear principally responsible for the recent spread of cooperatives and condominiums. First is the large tax subsidy to owner-occupied housing that has existed since the Second World War and that has been particularly large during the past two decades. Second is innovation in the forms available for organizing ownership in multiunit dwellings. A variety of considerations suggest that the first of these factors has been more important than the second and that, in the absence of the tax subsidy, cooperatives and condominiums would occupy a much smaller share of the housing market than they do at present. In support of this analysis, this article offers the first sophisticated calculations of the magnitude of the pure tax subsidy to owner-occupied housing, as

The Role of Trust in Nonprofit Enterprise

Andreas Ortmann and Mark Schlesinger, in their article “Trust, Repute, and the Role of Nonprofit Enterprise,” examine what they term “the trust hypothesis,” namely “the claim that asymmetric information in the markets for certain goods and services can explain the existence of nonprofit enterprise in those markets” (this volume). There is much that is sensible in what they say, and they have performed a valuable service in pulling together some of the more recent empirical literature on asymmetric information in markets heavily populated with nonprofit firms. I have some concerns, however, both with respect to the authors’ formulation of the trust hypothesis and with their approach to its verification.