Non‐Market Institutions in Economic Development: The Role of the Third Sector

In an article published in this journal in 2005, Dorward et al. argued that non‐market institutions are particularly effective in addressing market failures in the high‐transaction cost institutional environment which is often characteristic of low‐income countries. This comment develops additional theoretical underpinnings of this argument by exploring differences in the capacity for addressing market failure of for‐profit firms, on the one hand, and third sector organizations representing a major type of non‐market institutions, on the other. It is argued that while for‐profit firms address market failures by facilitating market exchange, third sector organizations do so by replacing exchange with self‐sufficiency. This recourse to self‐sufficiency is reflected in the important role of third sector organizations in economic development in low‐income countries.