Economic theories of the voluntary sector: a survey of government failure and market failure approaches

Abstract

This paper attempts to survey the economic literature on demand-based theories of the voluntary sector, which derive from theory of government failure and the market failure paradigm. We discuss scholarly attempts to define the voluntary sector and establish various criteria which characterise voluntary organisations as well as the ways in which different economists have sought to classify the theories of the voluntary sector. Moreover, we examine theories which invoke government failure to explain the genesis of the voluntary sector and review theories premised on market failure, including asymmetric information models, customer control models, principal-agent problems and private philanthropy, and disadvantaged consumers. The paper ends with some tentative extensions and criticisms of the literature on demand-based theories of the voluntary sector.