Consumer information and ownership in the nursing home industry

The hypothesis that non-profit organizations (NPOs) are prevalent in the health care industry because of consumers\u27 quality uncertainty dates back at least to Arrow (1963). The model developed here attempts to formalize this notion. It is shown that if government is vigorous enough in enforcing the non-distribution constraint (the legal prohibition against distributing profits earned by an NPO), non-profits can decrease the underprovision of quality both directly by providing services and indirectly by improving the equilibrium quality level in the for-profit sector. This model is tested against a full information alternative using nursing home data. Previous empirical work has focused on the question of whether or not quality is higher in the non-profit sector. The models in this paper demonstrate that this is a poorly posed question which can yield misleading policy implications. The results primarily favor the asymmetric information model and indicate that the coexistence of for- and non-profit firms may increase consumer welfare