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 impor-tance 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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