The article by Henry B. Hansmann explores the role and significance of nonprofit organizations in the economy, particularly in sectors such as education, research, healthcare, media, and the arts. These sectors are vital to the modern economy and present significant public policy challenges. However, the existing literature in law and economics has largely overlooked nonprofit institutions, leading to a lack of understanding and confusion in policymaking. The author aims to develop a broad perspective on the economic role of nonprofits, filling gaps in positive theories and providing a basis for informed policymaking. Hansmann categorizes nonprofits into four types based on their financing and control: donative mutual, donative entrepreneurial, commercial mutual, and commercial entrepreneurial. He argues that the proliferation of nonprofits can be explained by the presence of "contract failure," where consumers cannot effectively evaluate or enforce contracts with producers. In such cases, market competition may not provide sufficient discipline, leading to inefficiencies and potential exploitation of consumers. Nonprofits, by nature, avoid this issue because they are barred from distributing profits to those who control them, ensuring that earnings are used to produce services. The article provides examples to illustrate how contract failure leads to the preference for nonprofit organizations in various contexts, such as providing relief to the needy, public goods, and radio stations. It concludes that the corporate charter serves a different function in nonprofit organizations compared to for-profit ones, protecting the interests of patrons rather than shareholders. The author suggests that the role of nonprofits is a response to specific forms of market failure, particularly contract failure, and that this understanding can help clarify the economic rationale for their existence and operation.The article by Henry B. Hansmann explores the role and significance of nonprofit organizations in the economy, particularly in sectors such as education, research, healthcare, media, and the arts. These sectors are vital to the modern economy and present significant public policy challenges. However, the existing literature in law and economics has largely overlooked nonprofit institutions, leading to a lack of understanding and confusion in policymaking. The author aims to develop a broad perspective on the economic role of nonprofits, filling gaps in positive theories and providing a basis for informed policymaking. Hansmann categorizes nonprofits into four types based on their financing and control: donative mutual, donative entrepreneurial, commercial mutual, and commercial entrepreneurial. He argues that the proliferation of nonprofits can be explained by the presence of "contract failure," where consumers cannot effectively evaluate or enforce contracts with producers. In such cases, market competition may not provide sufficient discipline, leading to inefficiencies and potential exploitation of consumers. Nonprofits, by nature, avoid this issue because they are barred from distributing profits to those who control them, ensuring that earnings are used to produce services. The article provides examples to illustrate how contract failure leads to the preference for nonprofit organizations in various contexts, such as providing relief to the needy, public goods, and radio stations. It concludes that the corporate charter serves a different function in nonprofit organizations compared to for-profit ones, protecting the interests of patrons rather than shareholders. The author suggests that the role of nonprofits is a response to specific forms of market failure, particularly contract failure, and that this understanding can help clarify the economic rationale for their existence and operation.