Private Prisons and Government Contracting

by on June 13, 2005 at 7:14 am in Economics, Law | Permalink

Today, I will be debating the value of private prisons at the National Debate on Prisons and Punishment.  I intend to say the following:

1) Many studies (see also Changing the Guard) find that private prisons are cheaper than comparable public prisons.  Operating costs savings are a modest but not insubstantial, about 10-15 percent per year.

2) We should not be surprised that private prisons are
cheaper.  Mueller (2003), for example, looks at 71 studies
comparing public and private firms from Australian airlines, to German mail
delivery, to Indian manufacturers. In
only 5 of 71 studies were public firms found to be more efficient. In 56 studies private firms were
more efficient (the remaining studies found no difference).  Tellingly, the private firms were most efficient in the least regulated industries.

3)  Having said that, there are still potential problems with prison privatization and a puzzle that needs to be faced.  Prison privatization is really a misnomer.  What is really going on is contracting out and there at least two problems with contracting out.

a)  You get what you contract for. If the contract says cheaper prisons and nothing else – you will get cheaper prisons and nothing else. Contracts must cover quality as well as quantity.

Quality is not always easy to measure so contracting
out must be accompanied by investments in technology for contract monitoring
and output measuring. 

b)  In part as a reaction to the above problem there is the problem of governmentalization of the private sector.  Governmentalization occurs when the contract is written so that the private firm is restricted to duplicate the public firm, thus precluding innovation.  Some private prison contracts have gone so far as to detail the type of toilet paper to be used in the prison!

4) I think these problems can be addressed. For example, we should be contracting over outputs not inputs i.e. over the number of inmates who learn to read rather than the
provision of "reading programs."  (The British and Australians do this better than the U.S.)

Contracting out also requires an investment in technology for measuring outputs carefully. E.g.
recidivism rates.

With good contracting much more is possible from prison
privatization than lower costs including more innovation in prison management, better training
programs, reduced recidivism etc.

5)  But here is the puzzle.  If the reason for contracting out is that public prisons are run poorly, why should we expect government to do a better job at writing contracts?

I have some ideas on this but comments are open.

eric June 13, 2005 at 7:33 am

solution to 5: outsource the contract writing!

(actually i have no idea what to do.)

Grant Gould June 13, 2005 at 9:08 am

To expand on carpundit — one big problem with the governmentalization of the private sector is the strange arithmetic of incentives that it creates.

When the government internalizes both the cost and the benefit of every additional prisoner, one can expect it to do its usual muddling-but-adequate job of balancing these interests. But contracting out the handling of prisoners divides the incentives, leaving the incentive toward fewer prisoners in the hands of the government and the incentive toward more prisoners in the hands of the private contractors.

This is pessimal in a couple of ways. First, the private sector generally does a better job of serving its incentives anyway. Second, private prisons do have direct influence on prisoners’ recidivism rates, a mammoth conflict of interest. Third, of course, these private firms have lobbying power, blunting even the muddling and incompetent job that the government could ideally do of serving its incentives.

That looks more than a bit problematic from an economic point of view.

Ted Craig June 13, 2005 at 9:52 am

This Sunday’s Detroit News had a special report that was highly critical of the state’s private juvenile system. Here’s the link:

http://www.detnews.com/2005/specialreport/0506/12/A01-212531.htm

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