| Abstract: | Expense preference offers an alternative to profit-maximization theory in explaining firms' operating strategies (Williamson, 1963; Rees, 1974). Expense-preference theory suggests that when disctretionary behavior is allowed, corporate managers may choose to maximize individual utility instead of corporate profit. Expense-preference behavior tends to be evidenced by higher expenditures on items for which managers have a positive personal preference than would be justified by profit maximization. Conditions under which significant managerial discretion can emerge include weak competition, strictly controlled entry, a high degree of regulation, separation of ownership and control, and existence of a strong public interest character for the firm or industry (Awh and Primeaux, 1985; Edwards, 1977). The hospital industry may be characterized as operating under all the above conditions. Hospital ownership can be classified as being either not-for-profit or proprietary. Profit-maximization influences are generally not present in not-for-profit hospitals, thus further increasing managerial discretion with respect to operating expenses. This study provides support for the contention that expense-preference behavior exists in not-for-profit hospitals as compared to proprietary hospitals. Specifically, we present evidence of considerable managerial discretion in the allocation of resources in not-for-profit hospitals. |
