Public Subsidization Versus Private Donations: A Study of Incentives and Operational Performance

Abstract

This study uses a hospital setting to explore incentives and performance in organizations that are subsidized by taxes and governed by elected boards of directors. This governance system introduces incentives to over-monitor CEO performance, constraining administrative decision-making and leading to poor performance. Using data from California Hospitals for the period 1980-1998, we compare municipal district hospitals to a sample of non-profit hospitals. While district hospitals' charges are lower, their subsidies and donations are larger. Overall, we find that district hospitals have lower operating margins that deteriorate more rapidly in a difficult business environment and lower compensation for CEOs.

Keywords: Tax subsidization, Public monitoring, Operational performance

JEL Classification: G34, I18, M41, M46, L31, L32