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Nonprofit Production and Competition

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  • Darius Lakdawalla
  • Tomas Philipson

Abstract

Industries in which private nonprofit production is present and significant, such as health care and education, account for more than one-fifth of US economic activity. This paper argues that previous analysis of nonprofits has not separated profit-deviating preferences from the state-defined regulatory status of nonprofit production. We argue that this separation is crucial in providing predictions about the underlying forces which allow the coexistence of nonprofit and for-profit production in an industry, as well as predictions about such fundamental matters as the share of nonprofit activity. By separating choice of nonprofit status from profit-deviating preferences, the paper provides predictions about the forces which determine the share of nonprofit production in an industry. We argue that this share falls with the share of the demand that is publicly subsidized, rises with the total number of firms in the industry, and rises with growth in the pace or extent of cost-reductions resulting from learning-by-doing. These predictions stem from a basic aspect of regulatory nonprofit choice which links the degree of competition in a market with the share of nonprofits: the availability of economic profits under for-profit status raises the cost of choosing nonprofit status when such a status is associated with a distribution constraint. Empirical evidence using panel data on US states in the long-term care industry from 1989 to 1994 suggests the presence of the discussed predictions in this industry.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6377.

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Date of creation: Jan 1998
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Handle: RePEc:nbr:nberwo:6377

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  1. Wedig, Gerard J & Hassan, Mahmud & Sloan, Frank A, 1989. "Hospital Investment Decisions and the Cost of Capital," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 62(4), pages 517-37, October.
  2. Tomas J. Philipson & Gary S. Becker, 1998. "Old-Age Longevity and Mortality-Contingent Claims," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 106(3), pages 551-573, June.
  3. Gertler, Paul J., 1989. "Subsidies, quality, and the regulation of nursing homes," Journal of Public Economics, Elsevier, Elsevier, vol. 38(1), pages 33-52, February.
  4. Wedig, Gerard, et al, 1988. " Capital Structure, Ownership, and Capital Payment Policy: The Case of Hospitals," Journal of Finance, American Finance Association, American Finance Association, vol. 43(1), pages 21-40, March.
  5. Becker, Edmund R & Sloan, Frank A, 1985. "Hospital Ownership and Performance," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 23(1), pages 21-36, January.
  6. Paul J. Gertler & Donald M. Waldman, 1990. "Quality Adjusted Cost Functions," NBER Working Papers 3567, National Bureau of Economic Research, Inc.
  7. Susan Rose-Ackerman, 1996. "Altruism, Nonprofits, and Economic Theory," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 34(2), pages 701-728, June.
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