Forget Quality: Do Non-Profits Even Signal Their Status

Abstract

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.