The Effects of Organizational Form in the Mixed Market for Foster Care

We use proprietary quality of care data to examine the consequences of organizational form in privatized foster care services. This paper contributes to the empirical literature regarding the influence of organizational form on the performance outcomes of firms. Advocates argue that the nonprofits offer important consumer protections when public services are contracted to private agencies. The contract failure hypothesis proposes that nonprofits should provide higher quality services, relative to for-profits, when output quality is costly to observe. Contrary to expectations, we find that nonprofit firms do not offer higher quality services. Though, the presence of for-profit agencies appears to have a negative influence on nonprofit performance. We examine two possible rationales for this finding. First, monitoring efforts by state government may be sufficient to mitigate the incentive to shirk on non-contractible quality. Alternatively, anomalies in reporting patterns may indicate that for-profit firms misreport quality data to match their nonprofit counterparts