The visible hand in economics

Private prisons: National’s policy and “the proper scope of government”

Posted on: October 29, 2008

Today National released their corrections policy, which would allow the private sector to tender for the management of prisons.

Although not a completely ‘new’ concept for New Zealand (Auckland Central Remand Prison was privately run under the last National Government) it nonetheless raises the issue of when is it appropriate for such services to be ‘contracted out’ rather than provided ‘in-house’ by the government.

Hart, Schleifer and Vishny’s “The Proper Scope of Government: Theory and Application to Prisons” asks the question when should a government provide a service in-house, and when should it contract out provision? (Anyone interested in the full article may be able to locate it here).

The authors’ develop a model for asset ownership (in this instance a prison), which can be owned by the private sector, who contract back to the government, or alternatively can be owned outright by the government.

The central finding of the paper is that the private sector has relatively stronger, but seemingly contradictory, incentives to both reduce costs (driven by a profit motive, which comes at the expense of quality) and increase quality (to get a higher price from the government, who is an ongoing buyer of the service). In this instance the quality of a prison entails order in the prison, amenities that prisoners receive and rehabilitation.

The case for in-house provision is generally stronger when:

1. non-contractible cost reductions have large deleterious effects on quality;
2. quality innovations are unimportant; and
3. corruption in government procurement is a severe problem.

In contrast, the case for privatisation is stronger when:

1. quality reducing cost reductions can be controlled through contract;
2. quality innovations are important; and
3. patronage and powerful unions are a severe problem inside the government.

The authors conclude that there may be a case against prisons being managed privately on the grounds above.

From John Key’s perspective, it’s clear that he is concerned with the quality of the current service provision in-house. Indeed, a couple of his quotes are particularly interesting:

1. “There have been too many examples of poor management and of Corrections acting without the necessary regard for the safety of the public.”
2. “There is also widespread public scepticism resulting from facilities such as under-floor heating and flat screen televisions now available to prisoners, especially in the new prisons”.

Quote 1 suggests that under current in-house arrangements, the quality of service provision is poor. In this instance, it’s possible that private provision might not lead to lower quality services (even in the face of contractual incompleteness). Quote 2 suggests that there is large scope for cost cutting in prison provision, without necessarily undermining the ‘quality’ that we are referring to (although I’m sure the prisoners will be disappointed).

If Key’s claims are to be believed then there might be a reasonable case to use contracting out of prison services given the current low quality provision of service in-house and the opportunity for contracting out of such services to cut costs.


11 Responses to "Private prisons: National’s policy and “the proper scope of government”"

While I agree with the idea, I do wonder how to counteract or negate the strong incentive privately run prisons have to increase incarceration through lobbying etc? It seems like it’s a bit of a problem in the US, which I wouldn’t want happening here.

[…] … quality provision of service in-house and the opportunity for contracting out of such services to cut costs. GoonixPrivate prisons: National’s policy and “the proper scope of … […]

It’s true that private providers might use lobbying to increase incarceration. However, I’m not sure this is much different from politicians using their control rights (which are stronger under in-house provision than when services are contracted out) to pursue political interests, such as catering to interest groups in return for election support, which is an issue identified by the authors.

Here’s a thought: pay the prisons a bonus for every released prisoner who does not go on to reoffend within the next 2 years. Then they have an incentive to work out for themselves which rehab programs are worth the money and which ones aren’t.

There are private prisons all ove the world.
All it will mean is that the prison staff wear a company uniform and not the usual prison officers uniform.
In the UK there are a number of private prisons run by G4S – the staff wear G4S uniforms.

It’s still a prison and offenders will be sent to it.

“Then they have an incentive to work out for themselves which rehab programs are worth the money and which ones aren’t”

As long as the prison is not more risk-averse than society. Although I guess you could just charge the size of the “fee” to take this into account 😛

This is one of the areas where you have to be pretty careful in how you set up the contracts. Shleifer’s State versus Private Ownership is instructive.

Why would a for-profit company be more risk-averse than the median voter? I have a hard time imagining it. Don’t we usually model firms as being risk-neutral? Doesn’t the median voter support policies that forgo massive amounts of wealth in hopes of protecting against risk?

If you had a non-recidivist bonus, you’d need safeguards against prisons abandoning all attempts to reform serious crims relatively likely to re-offend (say, puppy-kickers), who, as soon as they’re released, go on puppy-kicking rampages up and down the country. More generally, you’d need a reward function resistant to being gamed.

“I have a hard time imagining it”

So do I 😛

“If you had a non-recidivist bonus, you’d need safeguards against prisons abandoning all attempts to reform serious crims relatively likely to re-offend”


– there are two types of prisoners: puppy-smackers and puppy-kickers,
– society views puppy-kicking as much more heinous than puppy-smacking,
– puppy-smackers cost much less to reform than puppy-kickers.

At the moment, a certain amount of government money is spent on reform programmes, with reasonable success for both puppy-smackers and puppy-kickers**. Say the government wants to keep spending about the same amount of money**, but would instead structure it as a flat bonus for each released prisoner who doesn’t reoffend. Depending on the size of the bonus, there are three** possibilities:

1. The bonus is so low that the prisons don’t try to reform anyone.
2. The bonus is high enough for everyone to be reformed — but then the government’s overpaid to reform the puppy-smackers.
3. The bonus is large enough to try to reform puppy-smackers but not puppy-kickers. Inmates are released and puppies are kicked. The government may** have given insufficient incentive to reform puppy-kickers, given the cost of them remaining unreformed — and may also have overpaid to reform puppy-smackers.

One solution: pay a different bonus for puppy-smackers and puppy-kickers. But, in the real world, there are hundreds of ways of abusing puppies, and setting a value for each type of reform would be a bureaucratic mess.

Another would be to fund the current amount of reform as a minimum and then offer a bonus on top of that. Maybe this would work, maybe this wouldn’t, but would someone please think of the puppies?

**Gross oversimplification and/or wacky assumption. Little of this is necessarily true, of course, but I could make up plausible numbers for which it would be true if I actually knew anything about the subject.

Off the top of my head, couldn’t you link the size of bonus to length of sentence (on the assumption that sentence length reflects how serious society thinks the offence is)?

Or, to elaborate on the bonus idea, you could offer payments that go up as the proportion of released prisoners who don’t reoffend go up. So, $x for the first 10%, $x+1 for the next 10%, $x+2 for the next 10%, etc. (This idea has been proposed for private welfare-to-work organisations in the UK.)

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