Note, For-Profit and Nonprofit Charter Schools: An Agency Costs Approach

Abstract

This Note applies agency costs theory to explain charter schools' use of forprofit and nonprofit forms, and to suggest ways to make charter school regulation more sensitive to the differences between these forms. Borrowing from Henry Hansmann's "contract failure" theory of nonprofits and recent data on the makeup of the charter school market, I argue that nonprofit forms dominate because they minimize the unusually high agency costs that characterize interactions between charter operators and the parents, regulators, and donors who influence them. For-profit schools survive only when the economies of scale they capture through superior capital-raising offset their higher agency costs. I also compare nonprofits' and for-profits' abilities to achieve some of charter school policy's more complex goals. These include resource attraction, localized governance, and output-based accountability. I conclude by arguing for changes in regulation to control for-profits more tightly and to reflect more accurately nonprofits' and for-profits' relative strengths.