The Yale Law Journal, Volume 89, Number 5, April 1980, discusses the role of nonprofit enterprises in the economy. Henry B. Hansmann argues that nonprofit organizations, which are not allowed to distribute their profits to individuals who control them, play a significant and growing role in sectors such as education, research, health care, the media, and the arts. These sectors face complex public policy issues, yet the legal and economic literature has not adequately addressed the role of nonprofits. Nonprofit corporation law is poorly developed and varies by state, with the Model Nonprofit Corporation Act showing uncertainty about basic issues. Nonprofits receive special treatment in various areas, including corporate income taxation, Social Security, unemployment insurance, and antitrust, but the principles behind this treatment are not clearly formulated. There is also debate about the National Labor Relations Board's shift in policy regarding the coverage of nonprofits under federal labor law. The article explores the economic role of nonprofit organizations, focusing on nonprofit corporations that produce goods and services. It categorizes nonprofits into donative and commercial types based on their funding sources and into mutual and entrepreneurial types based on control. Donative nonprofits rely on donations, while commercial nonprofits generate income from services. Mutual nonprofits are controlled by patrons, while entrepreneurial nonprofits are controlled by a self-perpetuating board. The article presents a general theory of the role of nonprofit enterprises, suggesting that they are a response to "contract failure," where consumers cannot effectively enforce contracts with for-profit producers. Nonprofits provide additional protection through their legal commitment to use earnings for services, which helps ensure that services are provided adequately. This is particularly relevant in cases where the service provider and recipient are separate, such as in charitable organizations. The article also discusses the role of nonprofits in providing public goods, where the private market is inefficient due to the free-rider problem. Nonprofits are more suitable in such cases because they can ensure that services are provided without the incentive to charge excessive prices. The article further examines the role of nonprofits in price discrimination, where they can charge different prices to different customers, and in implicit loans, where they help finance education through voluntary contributions due to the lack of an adequate system of educational loans.The Yale Law Journal, Volume 89, Number 5, April 1980, discusses the role of nonprofit enterprises in the economy. Henry B. Hansmann argues that nonprofit organizations, which are not allowed to distribute their profits to individuals who control them, play a significant and growing role in sectors such as education, research, health care, the media, and the arts. These sectors face complex public policy issues, yet the legal and economic literature has not adequately addressed the role of nonprofits. Nonprofit corporation law is poorly developed and varies by state, with the Model Nonprofit Corporation Act showing uncertainty about basic issues. Nonprofits receive special treatment in various areas, including corporate income taxation, Social Security, unemployment insurance, and antitrust, but the principles behind this treatment are not clearly formulated. There is also debate about the National Labor Relations Board's shift in policy regarding the coverage of nonprofits under federal labor law. The article explores the economic role of nonprofit organizations, focusing on nonprofit corporations that produce goods and services. It categorizes nonprofits into donative and commercial types based on their funding sources and into mutual and entrepreneurial types based on control. Donative nonprofits rely on donations, while commercial nonprofits generate income from services. Mutual nonprofits are controlled by patrons, while entrepreneurial nonprofits are controlled by a self-perpetuating board. The article presents a general theory of the role of nonprofit enterprises, suggesting that they are a response to "contract failure," where consumers cannot effectively enforce contracts with for-profit producers. Nonprofits provide additional protection through their legal commitment to use earnings for services, which helps ensure that services are provided adequately. This is particularly relevant in cases where the service provider and recipient are separate, such as in charitable organizations. The article also discusses the role of nonprofits in providing public goods, where the private market is inefficient due to the free-rider problem. Nonprofits are more suitable in such cases because they can ensure that services are provided without the incentive to charge excessive prices. The article further examines the role of nonprofits in price discrimination, where they can charge different prices to different customers, and in implicit loans, where they help finance education through voluntary contributions due to the lack of an adequate system of educational loans.