Managerial rewards and the behavior of for-profit,governmental, and nonprofit organizations: evidence from the hospital industry

Studies of mixed industries frequently focus on differential behavior between for-profit and either nonprofit or governmental producers. Substantially less is known about differences among governmental, religious nonprofit, and secular nonprofit organizations. We examine the compensation of hospital CEOs to assess the extent to which these three organizational forms pursue similar objectives. Compensation levels, the use of salaries versus bonuses as proxies for weak versus strong incentives, and the criteria organizations use to determine bonuses are analyzed. We conclude that the CEO incentive contracts at religious nonprofit, secular nonprofit, and governmental hospitals imply substantive differences in the behavior of these organizations.     

Team Incentives and Organizational Form

Conventional wisdom regarding nonprofit firms is that the absence of a profit motive renders them inefficient. However, the costs and product quality realized by profit-taking firms is determined by how well those firms deal with a variety of internal incentive and information problems, and this should be equally true for nonprofits. This article analyzes the team incentive problem in nonprofit organizations. Holmstrom (1982) showed that the introduction of a budget-breaker into a team permitted the creation of incentives to provide efficient effort when it is otherwise impossible. A similar result obtains for a nonprofit team, but the role of principal differs from that found in profit-taking teams. It is shown that any of: donors, government regulators, or Trustees can fulfill this role in a nonprofit team. One implication of this is shown to be that nonprofit firms may indeed pay employees less than otherwise identical employees earn in identical jobs in profit-taking firms.     

Precautionary savings and the governance of nonprofit organizations

We present a model of nonprofit governance built on two assumptions: (1) organizations wish to hold precautionary savings in order to smooth expenditures; and (2) it is relatively easy for managers to divert these funds for personal use. Hence, donors face a trade off between expenditure smoothing and donation dissipation. We examine the model's predictions using panel data on U.S. nonprofits. We show that organizations in states with poor government oversight have managerial compensation that is more highly correlated with inflows of donations and allocate a smaller percentage of donations to the endowment for future expenditures relative to organizations in strong oversight states.     

Quality, reputation and the choice of organizational form

This paper revisits the hypothesis that nonprofit organizations emerge in markets that are characterized by contractual incompleteness because they ensure consumers against opportunistic behavior. We extend the Glaeser and Shleifer [Glaeser, E., Shleifer, A., 2001. Not-for-profit entrepreneurs. Journal of Public Economics 81, 99–115] framework, which studies an entrepreneur’s optimal choice of organizational form and service quality when quality is non-contractible into a repeated interaction setting. The main result is that when reputations can be sustained, then for-profit status is the preferred organizational form and high quality services are ensured. This finding suggests that existing explanations of nonprofit organizations that focus entirely on contractual imperfections in the producer/consumer relationship may be inadequate.     

Coexistence of nonprofit, for-profit and public sector institutions

If nonprofit organizations are superior institutions in resolving informational asymmetry and resulting contract failure, why do nonprofit (NPs), for-profit (FPs) and government/public institutions (GPs) survive in the same industry? This article explicitly models the nonconvex budget set for the consumer that arises through the juxtaposition of the inefficiencies and contract failures that occur in the three sectors. Because the consumer is willing to trade quality for efficiency and price, varying market shares for NPs, FPs and GPs can exist in the same industry. The theory offered complements the functionalist explanation of the existence of nonprofits advanced by Weisbrod and Hansmann using a micro-analysis.     

The shifting boundaries of the mixed economy and the future of the nonprofit sector

The nonprofit sector exists because it can solve better than for-profit firms problems associated with the provision of products with publicness (nonrivalry or nonexcludability) attributes, or those affected by asymmetric information between providers and customers. This advantage is likely to be eroded in the future by various technological advances, particularly in the area of information transmission, analysis, storage and retrieval, and by the increase in the effective size of markets. Consequently, the demand for nonprofit organizations will possibly decline in the future. On the other hand, the operational efficiency of nonprofit organizations is likely to improve due to possibilities of stricter audit of and control over management made possible by enhanced access by nonprofit stakeholders to budgetary and operational information. This will help nonprofit organizations respond better to various failures of for-profit firms and to the insufficiency of government correctives. It is difficult to forecast the net effect of the myriad factors that work in opposite directions on the demand for and supply of nonprofit organizations, although it appears to this author that the economic weight of nonprofit organizations and their distinctive features will wane.     

The nonprofit sector and industry performance

Despite the importance of nonprofit industries in the economy, little analysis has been conducted as to whether the behavior of such industries differs from that of for-profit industries. Extending previous firm-level analyses, we propose a neoclassical theory with an endogenous nonprofit sector. Our analysis implies that nonprofit firms have a competitive advantage over for-profit firms, so that marginal changes in the industry operate through the for-profit sector. As such, marginal industry behavior is identical to that of a for-profit industry and nonprofit regulations may have a limited impact or even no impact on overall industry performance. Our theory has the methodological advantage that standard for-profit analysis applies directly to nonprofit firms, because they can be analyzed as for-profit firms with lower costs. We discuss aspects of the empirical literature that test this theory of nonprofit activity.     

Understanding nonprofit social enterprises: Lessons from Austrian economics

There is a large literature on the role of nonprofit enterprises within society. This literature typically views nonprofits as either substitutes for government enterprises or complements to, and even necessary extensions of, these government efforts. While this literature has improved our understanding of the role and importance of nonprofit social enterprises, how social entrepreneurs identify opportunities, allocate resources, and adapt to changing circumstances has been relatively underexplored. Efforts to fill this gap within Austrian economics have categorized nonprofits and identified the limitations of calculation and coordination in the nonprofit sector and the characteristics of successful and unsuccessful nonprofit enterprises. This strand of literature focuses on the differences between economic calculation in for-profit enterprises and decision making in nonprofit enterprises. We argue that another meaningful aspect to determining the ability of nonprofit enterprises to coordinate plans is whether they are structured more like private enterprises and public enterprises. These insights from Austrian economics shed light on why some nonprofits are more effective than others at achieving social goals.

     

Do China's State-Owned Enterprises Maximize Profit?

China's state enterprise reform is often believed to have made profit the most important goal of SOEs. Nonetheless the poor performance of SOEs relative to other forms of enterprises remains puzzling. We offer an explanation based on the incentive aspect of the reform, which complements the theory based on a soft budget constraint. Under certainty, the incentives of enterprise managers to maximize their own compensation are consistent with profit maximization with or without a soft budget constraint. Under uncertainty, however, the managers' incentives generally deviate from expected profit maximization. This deviation is dampened by, but still exists even without a soft budget constraint.     

A Theoretical Model of the Effects of Public Funding on Saving Decisions by Charitable Nonprofit Service Providers

Why do charitable nonprofit, service‐providing organizations save? What are the tradeoffs between using income to build up cash reserves and serving more clients? Saving may generate income, protect the organization against a drop in donations, and increase the organization's chances of survival. Saving, though, may affect the likelihood that nonprofits receive private and public funding. We model the relationship among private and public income, economic conditions, and nonprofit savings. We find that anticipation of government help during difficult times tends to reduce the amount of saving done by the nonprofit. This effect is strengthened if government officials view unspent donations as indicative of a lack of need. Both these effects provide a strong incentive for nonprofits to spend on current consumption rather than to save for the future, and thus to increase the burden on the public purse.     

The Interaction of Market Failure and Structural Adjustment in Producer Credit and Land Markets: The Case of Nicaragua

While nonprofit organizations serve the community in significant ways, their heavy reliance on philanthropic and government funding is increasingly not sustainable, especially in the wake of economic downturns. The application of social entrepreneurial principles — including social enterprise activities — can improve the sustainability of the business model of nonprofits, while bolstering management capacity and enhancing mission. This paper argues that the current funding model of the nonprofit sector should be disrupted in order to achieve a greater level of financial sustainability and mission-driven success.     

Performance, Promotion, and the Peter Principle

This paper considers why organizations use promotions, rather than just monetary bonuses, to motivate employees even though this may conflict with efficient assignment of employees to jobs. When performance is unverifiable, use of promotion reduces the incentive for managers to be affected by influence activities that would blunt the effectiveness of monetary bonuses. When employees are risk neutral, use of promotion for incentives need not distort assignments. When they are risk averse, it may—sufficient conditions for this are given. The distortion may be either to promote more employees than is efficient (the Peter Principle effect) or fewer.
" Promotions serve two roles in an organization. First, they help assign people to the roles where they can best contribute to the organization's performance. Second, promotions serve as incentives and rewards. " (Milgrom and Roberts (1992, p. 364))
" Promotions are used as the primary incentive device in most organizations, including corporations, partnerships, and universities . . . This . . . is puzzling to us because promotion-based incentive schemes have many disadvantages and few advantages relative to bonus-based incentive schemes. " (Baker, Jensen and Murphy (1988, p. 600))     

Incentives and managerial effort under competitive pressure: An experiment

We investigate how increased competition affects firm owners׳ incentives and managers׳ efforts in a laboratory experiment. Each owner offers a compensation scheme to his manager in two different conditions: under monopoly and under Cournot duopoly. Following acceptance of the compensation, the manager chooses an effort level to increase the probability of a cost-reduction which affects the firm׳s profit. According to standard theoretical predictions the entry of a rival firm in a monopolistic industry affects negatively both the incentive compensation and the effort level. Our experimental findings show that the entry of a rival firm has two effects on managerial effort: an internalization effect which affects positively the level of effort and an income effect which has a negative impact on effort. The combined outcome of these two effects is neutral with respect to managerial effort: we observe that when competition reduces the firm׳s profit, the owner reacts by offering lower incentives but despite the lower incentives the manager still accepts the contract offer and exerts the same level of effort than under the monopoly condition.     

Solving coordination failure with “all-or-none” group-level incentives

Coordinating activity among members is an important problem faced by organizations. When firms, or units within firms, are stuck in bad equilibria, managers may turn to the temporary use of simple incentives—flat punishments or rewards—in an attempt to transition the firm or unit to a more efficient equilibrium. We investigate the use of incentives in the context of the “minimum-effort,” or “weak-link,” coordination game. We allow groups to reach the inefficient equilibrium and then implement temporary, flat, “all-or-none” incentives to encourage coordination on more efficient equilibria. We vary whether incentives are positive (rewards) or negative (penalties), whether they have substantial or nominal monetary value, and whether they are targeted to a specific outcome (the efficient equilibrium) or untargeted (apply to more than one outcome). Overall, incentives of all kinds are effective at improving coordination while they are in place, but there is little long-term persistent benefit of incentives—once incentives are removed, groups tend to return to the inefficient outcome. We find some differences between different kinds of incentives. Finally, we contrast our results to other recent work demonstrating greater long-term effectiveness of temporary incentives.      

知识资本、企业边界与组织结构

本文主要从知识收益的角度分析了知识收益对企业边界的影响。首先定义了两种不同的知识收益——私人收益和集体收益。知识学习的两种收益对于企业来说是同时存在的、又是相对的,企业面临着知识学习的私人收益和集体收益最大化的选择。接着论述了不同的组织结构形态与知识收益的关系。其中,企业组织对应着对知识学习的集体收益的最大化,市场组织对应着对知识学习的私人收益的最大化,网络化组织则是对知识学习的集体收益与私人收益的综合考虑。最后,得出企业和市场并没有本质区别的结论,无论是企业、市场,还是介于企业与市场之间的网络组织都只是追求知识收益最大化的结果,企业、市场和网络组织在一定的条件下是可以相互替代的。     

What Economists Do about Values

The paper explores the way the work of classic institutionalist authors can inform modern nonprofit economics. From the Veblenian perspective, nonprofit organization is explained as an institutional consequence of the pecuniary-industrial dichotomy. The Ayresian theoretical system is used to highlight nonprofit organization as a particular form of the progressive weakening of the institution of private property in response to technological imperatives. Based on these arguments, the societal meaning of nonprofit organization is shown to be in realizing instrumental value that is unattainable through pecuniary ceremonial behavior embodied in the for-profit sector. At the same, in line with the Veblenian analysis of American universities, the ability of nonprofit firms to attain instrumental value is recognized as potentially limited by the corrupting effects of the embedding pecuniary culture.     

Coordination failure, property rights and non-profit organizations

This paper advances a socio-economic theory of nonprofit organizations aiming at conceiving this organizational form in its complexity and at analysing it from both the viewpoints of its economical and political (democratic) dimensions. This theoretical approach accounts for the existence of nonprofit organizations and the reasons why nonprofit organizations are relatively more efficient when compared with for-profit and government organizations in particular circumstances. The various current explanations of the existence of nonprofit organizations (contract failure, government failure, philanthropic failure) are regrouped around the concept of coordination failure. The paper then examines how nonprofit organizations are able to mitigate these coordination failures. The central thesis is that the specific distribution of property rights characterizing nonprofit organizations results in a particular type of governance structure which allows them to mitigate coordination failures. In turn, the ability of the organization to mitigate coordination failures and therefore its efficiency is conditioned on its democratic functioning.     

A household model of charitable contributions and tax incentives

The aim of this paper is to present a theoretical model of the monetary contributions made by households to nonprofit organizations, and to analyse the effect of tax incentives according to the different tax systems currently in force in the European Union Member States. This model is estimated by means of data drawn from the Family Expenditure Survey and the Regional Accounts in Spain covering the period 1990–91. We analyse the effects that different variables and tax incentives have on household decisions. The results indicate that the decisions to donate, and how much to be donated, are taken sequentially and are significantly influenced by household characteristics, the provision of public funds and donation price. The analysis of the Spanish tax system indicates that the model generates donation incentives.     

Corruption,intrinsic motivation,and the love of praise

Do higher wages prevent corruption (bribe taking)? We investigate a setting where individuals who apply for public sector jobs are motivated not just by monetary incentives but also by intrinsic motivation and concern for the collective reputation of their profession. We show that an increase in monetary compensation may cause reputation‐concerned individuals to be more prone to participate in corruption due to an “overjustification” effect. The overall effect of monetary incentives on fighting corruption crucially depends on the composition of the pool of public sector workers for two reasons: first, different types of workers react differently to the same policy; second, the composition of the pool of workers affects individual behavior through its effect on collective reputation. These results imply in particular that policies to fight corruption should focus more on increasing the collective reputation of the public sector rather than using monetary incentives, which have perverse effects on some agents.