Outsourcing and Ownership: Theory and Evidence from California General Care Hospitals
Abstract: For-profit hospitals in California contract out to a much greater extent than either public hospitals or private non-profit hospitals. To explain why, we build a model in which the outsourcing decision is a trade-off between net revenues and quality. Since non-profit firms must consume profits indirectly through perquisites, they will trade-off differently from for-profit firms. This difference will be emphasized when quality is important or the firm is hit with a positive net-revenue shock. We test these predictions in a panel of California hospitals, finding evidence for each. These results suggest that a model of public or non-profit make-or-buy decisions should be more than a simple relabeling of a model derived in the for-profit context.
