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Why Private Firms, Governmental Agencies, and Nonprofit Organizations Behave Both Alike and Differently: Application to the Hospital Industry (WP-04-08)

Burton A. Weisbrod

This paper addresses two specific questions: (1) What behavior is predicted by a “two-good model” in which nonprofit and governmental organizations maximize output of a mission-good—defined as socially desirable but privately unprofitable—and produce a profitable revenue-good to finance that mission? (2) To what extent can the observed differences in economic behavior among institutional forms be explained by differential organizational goals as reflected in managerial reward structures? Weisbrod finds that for-profit and three forms of not-for-profit hospitals provide significantly different sets of outputs, generally consistent with the model in which not-for-profits provide all the outputs that are profitable, as gauged by their provision by for-profits, but also provide many outputs that for-profits do not, reflecting not-for-profits’ broader objectives. About half of the observed differential organizational output mix is explained by a set of three variables capturing CEO incentives: total monetary compensation in the forms of base salary and bonus, the relative importance of each of those components, and a measure of CEO job complexity. Differential institutional behavior is substantially a consequence of reward structures, which reflect the organization’s objective functions.

Burton A. Weisbrod, Economics and Institute for Policy Research, Northwestern University

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