How the Hope of Profit Engenders Economic Behaviors

Abstract

The hope of profit creates incentives rooted in the prospect of residual profits, motivating firms towards cost minimisation, revenue maximisation, and innovation, but potentially also towards opportunism or externalising social costs. Whether such behaviour is better or worse requires an evaluation of which ownership structures magnify societal welfare. While profit incentives may cause cost-cutting behaviours and inefficient resource allocation in private industries, the absence of it government and charity-run industries often leads to a higher quality baseline in essential services, better welfare, and reduction in deaths. By focusing on an unregulated baseline, the article employs Hart et al.’s (1996) model of optimal ownership structure to sort industries into four quadrants based on varying hidden-harm potential and innovation-payoff levels. Under each quadrants, case studies on welfare, customer satisfcation, and service quality are provided and analyzed. Overall, it argues that an economy made up entirely of public and charity-run enterprises would, on balance, engender better behaviour.