Forget Quality: Do Non-Profits Even Signal Their Status
18 Pages Posted: 3 Oct 2005
Date Written: September 23, 2005
Why do firms take non-profit status? One of the most popular theories in the law and economics literature is that non-profit status is a signal of quality (Hansmann 1980; Glaeser & Shleifer 2001). This paper offers a simple, empirical test of this theory. If non-profit status signals quality, surely non-profit firms would want to ensure that consumers were aware of their non-profit status. A simple way firms could broadcast such a signal would be to add it to their names, but this sort of signaling is unheard of. Alternatively, firms might indicate their non-profit status on, e.g., their website or in yellow pages listings. Taking this cue, we conduct a survey of over 2800 firms in the hospital, nursing home and childcare industries. Our aim is to determine whether non-profit firms communicate their status to consumers on their websites or yellow pages listings.
We conclude that non-profit status may signal quality, but the value of the signal is very poor. We infer this from the fact that firms that have other signals of quality, such as a religious or academic affiliation, are less likely to signal that they are non-profit. Firms only signal non-profit status, however, when it is cheap to do so. The most costly signals we examine are those in yellow pages listings, followed by home pages and then about-us pages on websites. Yet less than 7.5 percent of non-profit firms signal their status in yellow pages listings; only 25 percent do so on their home pages and 30 percent on their about-us pages. Indeed, over 35 percent never signal their non-profit status. Even among firms that have no other indicators of quality, roughly 70 percent of hospitals and 30 percent of nursing homes never signal their status on their websites.
Keywords: Non-Profit Status, Quality Signaling, Advertising
JEL Classification: L21, L31, M37, I10
Suggested Citation: Suggested Citation