Structure of Organizations for Public and Private Goods

On Tuesday, April 3rd, Professor Shyam Sunder delivered a lecture at the Yale School of Management about the structure of organizations for production of public and private goods. Professor Sunder is the James L. Frank Professor of Accounting, Economics and Finance at the Yale School of Management. His presentation concluded this year’s series of PONPO-sponsored lectures at Yale SOM. PONPO (the Program on Non-profit Organizations) is a joint project of Yale SOM and the MacMillan Center for International and Area Studies at Yale. It fosters interdisciplinary research aimed at developing an understanding of non-profit organizations and their role in economic and political life.

Professor Sunder’s talk focused on the myriad challenges of structuring the production of goods in public organizations, as opposed to the relative ease of doing so in private organizations. For example, in private organizations, customers can discipline managers by denying them revenue directly, and shareholders can exercise control of managers by linking their compensation to net income. In contrast, public organizations have limited ability to discipline managers, and thus the efficient production of goods becomes far more challenging in public and non-profit organizations.

Since 1976, Professor Sunder observed, many have argued that the management and structure of NGOs has often been weak because they are not managed like businesses. The question then becomes whether applying traditional for-profit business management practices to NGOs will yield positive effects. Experiments in this direction have produced mixed results. In some cases, applying business management practices to NGOs and to government entities has worked quite well. However, there have also been cases where this strategy did not work, such as with the application of business practices to the Department of Defense.

Indeed, while some principles of business management might help increase efficiency in public sector organizations, others might be detrimental. Traditional business accounting practices, for example, do not always translate well to organizations in the public and non-profit sectors.

In order to best apply business management practices to non-profit and government organizations, more research is necessary to develop economic theory and best practices on this subject. Traditionally, business schools have not devoted much attention to this, which has had a negative impact on progress in this field. Compared to its peers, Yale SOM has placed relatively greater emphasis on this important subject, both through elective courses, and more recently in cases incorporated into core curriculum classes such as the Innovator Perspective.

Professor Sunder concluded his remarks by noting that an integrated economic theory of management and structure for production of public vs. private goods may help direct more attention to teaching and research in this significant segment of the national economy.

The program featured a closing Q&A session for the students, faculty and Yale community members in attendance. This session included a robust discussion of possible remedies to the efficiency problems that Professor Sunder outlined. One suggestion was to focus on strengthening performance metrics for non-profit organizations in particular, thereby improving the ability to measure each organization’s efficiency in meaningful ways. Another echoed Professor Sunder’s call to ensure that microeconomics classes across business schools include more exploration of public organizations. While the challenges to non-profit organizational efficiency are clear, the solutions are less so, and harnessing the considerable intellectual and creative thinking across MBA programs is certainly an important and useful step forward in finding these solutions.

Lindsey White