Non-profit and for-profit entrepreneurship: a trade-off under liquidity constraint

Many non-profit enterprises are created ex-nihilo by individuals. The choice of non-profit status may be all the more surprising since this legal form denies founders the right to appropriate profits from the invested capital. The aim of this article is to understand the reasons why some individuals decide to create non-profit organisations instead of for-profit firms and do so under liquidity constraint. The model suggests that non-profit organisations enter at higher optimal levels of production, and are more constrained by access to credit. Moreover, non-profit entrepreneurs are more managerially efficient than their for-profit counterparts. However they cannot allocate capital as efficiently as the for-profit firms would do.