The Welfare Effect of Banning Signaling in Not-for-Profit Industries

Rationale: Why are not-for-profit organizations desirable and prevalent in health care market? This question has been asked again and again. However, it is rarely asked whether the not-for-profit status should be enforced on all hospitals or not. This second question is ours. It is mandatory for private hospitals to have the not-for-profit status in Japan. Recently, it has been discussed that for-profit hospitals should be allowed to enter the health care market. The answer to the second question will give a settlement to this policy debate. Objective: The objective of this paper is to compare welfare in two different settings. One is that the nondistribution constraint (NDC) is enforced on all hospitals. Another is that each hospital can choose taking the NDC or not. It is the nondistribution constraint (NDC) that makes an organization be not-for-profit as legal status. The NDC is imposed on not-for-profit hospital, but not on for-profit hospitals. Therefore, the former setting corresponds to the present condition in Japanese hospital market and the latter corresponds to the condition after the policy reform. Methodology: Theoretical model is constructed to make a comparison of welfare in two settings. The key ingredients of our model are heterogeneity among hospitals and among patients. There is heterogeneity of altruism among hospitals. This is introduced into the model to avoid the confusion between not-for-profit concepts such as charity motive and legal status. Patient tastes for quality are also heterogeneous. In our model, taking the NDC serves as a signal of high quality when each hospital has the option of taking the NDC or not. Thus, heterogeneity of patient tastes is essential when we think about a welfare improvement through signaling. Results: When policy maker can control the fee for not-for-profit hospital service, the fee for for-profit hospital service, and the strength of the nondistribution constraint (NDC), we have the following results. First, when the NDC is optional, taking the NDC is able to serve as a signal of high quality supplier. Second, when the NDC is optional, there exist fee combinations which clear both of the markets for not-for-profit hospital service and for for-profit hospital service. And, the welfare under optional NDC is equal to or better than the welfare under the compulsory NDC. In other words, the optional NDC weakly dominates the compulsory NDC in terms of welfare Conclusion: In the typical debate about reform of nonprofit restriction in Japanese health care market, the proreform maintains that for-profit hospitals have more efficient production and the anti-reform insists that not-for-profit hospitals provide higher quality. Their points of argument are different from each other. Then, the policy debate has no common ground for argue on. However, our results are supportive of the deregulation even from the anti-reform's quality viewpoint since the optional NDC improves welfare by achieving better match between patient tastes for quality and quality provided