The nonprofit advantage: Producing quality in thick and thin child care markets

Nonprofit child care centers are frequently observed to produce child care which is, on average, of higher quality than care provided in commercial child care centers. In part, this nonprofit advantage is due to different input choices made by nonprofit centers—lower child‐staff ratios, better‐educated staff and directors, higher rates of professional development for staff. Nonprofit centers may have an additional productivity advantage, due to unmeasured staff motivation and abilities or to better management of the production of good‐quality child care. However, where nonprofit and for‐profit child care firms compete in the same local markets, we speculate that this extra advantage should only appear where demand is sufficiently “thick” to permit a quality differentiation strategy to be financially viable for nonprofits. We estimate the effect of nonprofit status on quality, controlling for differences in financial resources available to the center, differences in the clientele served, and differences in staff and center inputs. In this conventional examination, nonprofit status has a moderately positive impact on quality. However, when we account for the unobserved heterogeneity and separate markets into “thick” and “thin,” a particularly strong nonprofit advantage is found in thick markets, but no productivity advantage for nonprofits is found in thin markets. This finding suggests a clear role for nonprofit organizations in improving the cost‐quality trade‐off faced by parents, but also identifies the market conditions that affect the ability of nonprofit managers to employ this advantage. © 2009 by the Association for Public Policy Analysis and Management.