Exemption or taxation for profits of non-profits? An answer from a model incorporating managerial discretion

Many non-profit organizations engage in both charitable and purely commercial activities, where profits from the latter are used to finance the former. Should business income be tax-exempted because of its cross-subsidization function? The effects of exemption on the product mix are analysed, using a model incorporating managerial discretion - a crucially different assumption from that of the current literature. Under given assumptions, tax-exemption of commercial income emerges as a less efficient means of supporting the charitable product than alternative Government measures, such as an output subsidy.