Does demand heterogeneity affect the nonprofit sector size? Testing Weisbrod’s government failure theory with a new dataset

Abstract The past few decades have seen the nonprofit sector expand worldwide, but its size varies by region and country. One major theory regarding this phenomenon is Weisbrod’s government failure theory (Weisbrod 1975), whose core hypothesis, the demand heterogeneity hypothesis, has been empirically tested. However, the inconsistent results of these investigations have prompted additional empirical studies. Meanwhile, relevant empirical analyses have been relatively scarce, and the international comparison data, the Johns Hopkins Comparative Nonprofit Sector Project (CNP) dataset, they have used have not been updated. Therefore, after confirming the correlation between the CNP and V-Dem datasets, this paper empirically examined the demand heterogeneity hypothesis using V-Dem, an annually updated international comparison dataset. Through a multilevel analysis that integrates differences in political regimes, this study supported Weisbrod’s hypothesis that larger population heterogeneity (ethinic, language, religion) is associated with a larger nonprofit sector. Additionally, the findings provide new evidence that the hypothesis holds even when the analysis included countries in Latin America and Asia, which had been excluded in previous studies, and those that are only partially democratic. JEL Classification: L31; L38