The core argument of the contract failure theory is that:
Government is inefficient in providing public goods; therefore nonprofits step in to meet residual unsatisfied demand for public goods.
Information asymmetry between customers and service providers leads to the breakdown of ordinary contractual mechanisms; therefore nonprofits arise in situations in which consumers feel unable to accurately evaluate the quantity or quality of the service a firm produces for them.
Nonprofits are sponsored by governments because they are more trustworthy than for-profit organizations.
None of the above.