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Organizational form and output quality

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  • Mati Dubrovinsky
  • Ralph A. Winter

Abstract

This paper re‐examines the relationship between a firm's organizational form, not‐for‐profit versus for‐profit, and its output quality. The Arrow‐Hansmann theory of hidden action on the part of providers predicts higher quality for not‐for‐profit suppliers. This prediction has a puzzling lack of support in the empirical literature. We propose a theory that resolves the empirical puzzle and generates additional testable implications. The theory starts with the traditional assumptions of hidden action and supplier altruism. It then incorporates two additional features of real‐world markets: hidden information on supplier ability to provide high quality and a variation across buyers in the degree of informational asymmetry. The central prediction of the theory is that quality has a higher variance across for‐profits than across not‐for‐profits. Preliminary evidence from the US market for hospital care is consistent with this prediction. Forme organisationnelle et qualité de l'extrant. Ce texte réexamine la relation entre la forme organisationnelle de la firme (à but lucratif versus à but non lucratif) et la qualité de son extrant. La théorie Arrow‐Hansmann de l'action cachée de la part des fournisseurs prédit une qualité plus grande pour l'extrant des offreurs sans but lucratif. Cette conjecture a rec¸u un manque déconcertant de support dans la littérature empirique. Les auteurs proposent une théorie qui à la fois résout l'énigme et engendre des implications qu'on peut mettre à l'épreuve. La théorie part des postulats traditionnels d'action cachée et d'altruisme de l'offreur. On incorpore deux éléments supplémentaires des marchés dans le monde réel : d'une part, l'information cachée à propos de la capacité de l'offreur à fournir un extrant de haute qualité, et, d'autre part, une variation dans l'éventail des acheteurs du degré d'asymétrie informationnelle. La prédiction centrale de la théorie est que la variation de la qualité est plus grande pour les firmes à but lucratif que pour les firmes à but non lucratif. Des résultats préliminaires pour les marchés américains de soins hospitaliers supportent cette conjecture.

Suggested Citation

  • Mati Dubrovinsky & Ralph A. Winter, 2015. "Organizational form and output quality," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 48(1), pages 189-206, February.
  • Handle: RePEc:wly:canjec:v:48:y:2015:i:1:p:189-206
    DOI: 10.1111/caje.12129
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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