DP11240 Wolves in Sheep's Clothing: Is non-profit status used to signal quality?

Author(s): Daniel Jones, Carol Propper, Sarah Smith
Publication Date: April 2016
Keyword(s): non-profit, nursing homes, quality disclosure
JEL(s): I11, I18, L31
Programme Areas: Public Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11240

Why do firms adopt non-profit status? One argument is that non-profit status serves as a signal of quality when consumers are not well informed. A testable implication is that an increase in consumer information may lead to a reduction in the number of non-profits in a market. We test this idea empirically by exploiting an exogenous increase in consumer information in the US nursing home industry. Indeed, we find that the information shock led to a reduction in the share of non-profit homes in the market, driven by a combination of home closure and sector switching. The lowest quality non-profits were the most likely to exit. Our results have important implications for the effects of reforms to increase consumer provision in a number of public services.