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Objective Functions and Compensation Structures in Nonprofit and For-Profit Organizations: Evidence from the "Mixed" Hospital Industry (WP-02-10)

Burcay Erus and Burton A. Weisbrod

This paper examines the compensation/incentive structures used in each of two forms of nonprofit organizations, religious and secular, by comparison with for-profit organizations, in an industry where they coexist, hospitals. The goal is to understand whether the objective functions of the three forms of hospitals differ. To pursue this we study compensation of CEOs and each of 14 other jobs at middle management and technical levels, at hospitals of each form. We also investigate the responses of compensation structures in the three institutional forms to an exogenous change in demand. We focus on the 1990s to capture the effects of the growing emphasis on health care cost containment, which was manifested in reduced prices for patient care. We hypothesize that responses to the exogenous fiscal stringency differed across institutional forms, reflecting differential objective functions, but only for top management, not for lower level workers. The analyses account for the effects of competition, as measured by Herfindahl indices, and of HMO penetration. The findings for CEOs disclose that nonprofit hospitals use weaker incentive mechanisms compared to for-profit hospitals, and there is some evidence that the differences decrease with competition and HMO penetration as well as over time. In lower level jobs there was no systematic pattern of differences across ownership forms in the levels of compensation or the use of bonus rewards, at the beginning of the period or at the end.

Burcay Erus, Department of Economics, Northwestern University

Burton A. Weisbrod, John Evans Professor of Economics; Faculty Fellow, Institute for Policy Research, Northwestern University

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