Established economic theories of nonprofit organizations are incomplete. They tend to treat nonprofits as a black box; in other words, they do not address the severe incentive problems that can and do arise within nonprofit organizations and that undermine the main building block of traditional theories of nonprofits-the nondistribution constraint. Modern economic theory can help to unpack the black box. It also suggests research questions and policy prescriptions quite different from those advocated by established economic theories of nonprofit organizations. The author argues that game theory, by virtue of its emphasis on strategic interaction and asymmetric information, and its ability to conceptualize organizational culture and integrity, provides a unifying framework for understanding the insights of modern economic theory. The author also argues that game theory is ideally suited to help practitioners understand incentive problems.
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