Sunday, July 22, 2007

The Nature of Nonprofit Firms

Organizational economists are learning more about family firms and cooperatives but still know relatively little about nonprofits. What is their objective function? How are they organized, managed, and governed?

Jill Horwitz and Austin Nichols's NBER paper, "What Do Nonprofits Maximize? Nonprofit Hospital Service Provision and Market Ownership Mix" looks at the behavior of nonprofit, government, and for-profit hospitals to address these questions. Their key finding is that nonprofit and government- owned hospitals respond to competiton; the more local-market competition they face from for-profit hospitals, the more likely they will offer profitable services and the less likely they will offer unprofitable services. For- profit hospitals, however, tend to offer the same mix of services regardless of what competing for-profit hospitals are offering.

Overall, Horwitz and Nichols find the Newhouse (1970) model, in which nonprofits maximize their own output, more plausible than the Hirth (1999) model in which nonprofits are "for-profits in disguise."

Originally posted by Peter Klein of Organizations and Markets

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