The Maximization Assumption, Profit Maximization and Not-for-Profit Hospitals

Abstract

This chapter reviews two distinct critiques of the maximizing assumption: (i) the world is too complex for firms to understand sufficiently to be able to solve any type of maximizing problem; and (ii) while firms can be viewed as maximizing entities, the object of their maximization problem is not (solely) profits. We argue that these objections often miss the point and that the profit maximization assumption can frequently be justified on methodological grounds. Only when the simplified objective of profit maximization does not yield sufficiently accurate predictive power, is a case made for a more complex multiple objective function. We discuss some empirical evidence that suggests that a multiple objective function, including both profits and patients treated, is necessitated in the analysis of behavior of U.S. not-for-profit hospitals.