Measuring the Third Sector Efficiency: Problems and Solutions

Abstract

The key distinction of non-profit organizations (NPO) from for-profit private firms is that the former have no owners and do not distribute profit to shareholders. This feature leaves NPOs without a natural efficiency criterion reflecting goals of such organizations, and greatly complicates the analysis of NPO efficiency. The paper critically assesses the existing approaches to measurement of NPO efficiency and proposes the production frontier approximation as an efficiency measurement tool which is both practical and, under certain assumptions, adequate to the problem of NPO performance evaluation. Application of the proposed method is discussed, including measurement of efficiency of non-profit associations, such as associations of homeowners.