Profit versus non-profit firms in the service sector: an analysis of the employment and welfare implications

In the dynamic model presented in the paper, manufacturing and service firms coexist. Two general equilibrium frameworks are compared, in which the service-providing firms are for profit enterprises or, alternatively, nonprofit organizations. Unlike in the related literature, a non-profit firm has no comparative advantage in dealing with the asymmetry arising from the fact that customers do not know ex ante the quality of the service. The paper shows that steady-state employment is higher when the service-providing firms are non-profit organizations. Moreover, the steady state associated with the presence of non-profit organizations is Pareto-superior if they enjoy a significant advantage at motivating their employees.