The Nature of the (Nonprofit) Firm

18 July 2007 at 2:53 pm 3 comments

| Peter Klein |

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. 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.” (HT: De Gustibus)

Entry filed under: - Klein -, Theory of the Firm.

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3 Comments Add your own

  • 1. Shawn Ritenour  |  18 July 2007 at 6:51 pm

    I always thought that Nonprofit firms maximize nonprofits.

  • 2. Pablo  |  19 July 2007 at 7:42 am

    You also recently had the first nonprofit IPO:

  • 3. Henrik Berglund  |  20 July 2007 at 7:12 am

    As you might know, Henry Hansmann has written some interesting things about non-profits. Focusing on transaction and information costs, including their implications for internal decision making and corporate governance, he presents a very plausible account for why certain ‘industries’ are dominated by non-profits. It is very analytical so it should appeal to O&M readers.

    Start with his The Ownership of Enterprise which is searchable on

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