The Social Optimality of Production by Nonprofit Institutions


by Adele P. Massell, James Hosek


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Analyzes the question of whether nonprofit firms, such as hospitals, necessarily have the "bias against producing low-quality products" concluded by Newhouse in his pathbreaking Toward a Theory of Nonprofit Institutions (P-4022, January 1969). This paper demonstrates that the conclusion applies if the decisionmaker seeks to maximize both average quality and total quantity, but not if he specializes in one quality level, assuming that the nonprofit firm is constrained to break even with respect to each quality level.

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