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

Publication Date

04/20/2016

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Abstract

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.