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Private Prisons and Government Contracting
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.
Posted by Alex Tabarrok on June 13, 2005 at 07:14 AM in Economics, Law | Permalink
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"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?"
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Comments
solution to 5: outsource the contract writing!
(actually i have no idea what to do.)
Posted by: eric at Jun 13, 2005 7:33:52 AM
I hope this is not an improper comment. I spent a few years as a civil rights investigator in a major U.S. city that had two jails - one public and one private. The inmate populations were the same, and the guards were drawn from the same labor pool.
Investigating alleged abuse at the private facility was much harder. The guards felt a strong economic motive to cover up their actions (even if their actions were not criminal) - the loss of their company stock, or the decline in its value. The stock price of the private company was written every morning on a white board in the jail lobby, and it -rather than prison management- became the focus of the institution. Also, the private company had trouble finding guards, so it drew from the ranks of the public system, often hiring the fired, or the worst performers. On the other hand, their cover-ups were much more efficient than the ones at the public jail.
I see how it's supposed to work, but in my experience, outsourcing such an essential government function is both wrong on a theoretical level and dysfunctional in practice. I worry even more about the outsourcing of law enforcement (speed cameras, red light cameras, and private patrols are current examples).
Power always corrupts anyway. Why provide economic incentives on top of that?
Posted by: carpundit at Jun 13, 2005 8:06:14 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.
Posted by: Grant Gould at Jun 13, 2005 9:08:55 AM
I am dubious that there are serious long-term benefits to privatizing services for which the government is the only client (prisons, certain municipal serveces, certain military services, etc.). As this post and other commentors point out, there is a tension in these situations between cost and public oversight. I suspect that if private firms become burdened with the degree of public oversight we expect then, on average, the costs will not improve.
In situations where there are multiple clients (public and private, or multiple public clients), it makes much more sense to privatize. The trick, I suspect, may be to think about dividing the problem into pieces that allow for the maximum benefits of privatization. For example, with prisons, contract out maintanence, laundry, housekeeping, medical care, etc. because these areas benefit from a large client base. But probably don't privatize the job of warden or the prison guards, since the public sector is the only real client of these servces.
Posted by: Patrick at Jun 13, 2005 9:31:43 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
Posted by: Ted Craig at Jun 13, 2005 9:52:08 AM
I am a huge fan of privatization, but privatizing prisons really worries me. What I am worried about most is that the two ways prison contractors can increase their profit is either through cost cutting or higher revenue. The only way they can achieve higher revenue is through having more prison inmates. I just see that it creates a perverse incentive to lobby for stricter jail sentences or criminalizing more actions. This is not to say that the public sector is free from these incentives. I believe it was the prison guard union that gave the most campaign contributions to California governor Gray Davis. The contributions were mainly in response to the "3 strike" rule. Crappy situation all over.
Posted by: Nacim Bouchtia at Jun 13, 2005 12:29:47 PM
Here's more on that last point, about lobbying by those running prisons.
--------
http://www.alternet.org/story/17392
Perhaps most controversial is [the Correction Corporation of America's] CCA's close ties to the American Legislative Exchange Council (ALEC). ALEC is a powerful force in the promotion of the conservative policy agenda among state legislators. One of its major functions is writing model bills that advance conservative principles and working with its members to have these bills introduced. CCA has been a corporate member and a major contributor to ALEC and a member of its Criminal Justice Task Force. CCA executives have co-chaired the Task Force over many years. As a result of the model bills developed by the Task Force, ALEC claims credit for the widespread adoption of Truth in Sentencing and Three Strikes/Habitual Offender legislation. Through its support of ALEC, CCA is helping to create greater demand for its services as a result of changes in state policies that keep more people behind bars for longer periods.
--------
Posted by: aram harrow at Jun 13, 2005 12:44:17 PM
Here's an exerpt from my post on this matter:
MR notes that operating costs at private prisons are lower than at public prisons. However, markets won't achieve effecient outcomes in the presence of externalities. And prison programs do impose outside effects, for example improving literacy of inmates might reduce their propensity to commit a crime, which (crime) affects victims who are better off. There is no way to arrange for side payments from the victims in either private or public systems, but public prisons at least will not have profit as the main motivation.
For more details visit my blog, and also what are the conditions for you to unblock my trackbacks/comments?
Posted by: Sultan at Jun 13, 2005 12:44:27 PM
An ideal opportunity for offshore outsourcing.
Posted by: Dave Schuler at Jun 13, 2005 1:05:26 PM
Damn! Too bad Gitmo's taken.
Patrick's got the achilles heel of privatization down. How are you supposed to have a non-dysfunctional market with a customer base of only one, and a customer that is not really spending it's own money at that.
Posted by: Battlepanda at Jun 13, 2005 1:22:46 PM
make the contracts "cost plus" with the "plus" being inversly proportional to sentence length, and give healthy bonuses pegged on percentage of former inmates who do not repeat offend 6 mo/1 yr/2 yrs after release. Perhaps demand discounts for housing repeat offenders.
Posted by: Doug at Jun 13, 2005 1:50:58 PM
There's a more serious problem, and that's who's going to prison and why.
Prosecutorial misconduct is rampant, testilying is common among "peace" officers, those enaged in drug commerce are imprisoned unjustly or are forced into violence because they cannot rely on open court to settle disputes, regulatory mishaps are increasingly criminalised, death row inmates were exonerated at a shocking rate once DNA testing came into play...arguing whether the state or a crony capitalist should run the prisons is irrelevant.
- Josh
Posted by: Wild Pegasus at Jun 13, 2005 3:44:36 PM
Prisons are one of the few things the government, rather than private entities, should do. Private/contracted-out prisons are absolutely against public policy. When a huge corporation's bottom line is dependent upon the longest, harshest sentences and the fewest acquittals possible, public policy dictates that this scenario be prevented at all costs. Anyone who favors private prisons should go see the b-movie "Fortress."
Posted by: bruce at Jun 13, 2005 4:03:09 PM
One ironic thing about privatized prisons is that they have incentives to be more lenient to prisoners. Things like weight rooms and TVs help keep prisoners under control.
Posted by: joe o at Jun 13, 2005 5:34:48 PM
Tyler,
Even your use of recidivism as a potential performance metric shows how hard it is to measure private sector performance in government contracts. I think it unlikely that prisons can do much to change recividism rates.
Each prison would not get the exact same mix of prisoners. Therefore to compare prisons for recividism rates we'd need to come up with a model to predict recidivism rates for each inmate. Then see how well each prison does reshaping each prisoner.
One problem with that model is that a course delivered to prisoners to show them how to reduce the rate of getting caught by the police would lower their measured recidivism rate. Also, pairing experienced and young criminals in cells might lower recidivism rates by allowing the experienced to teach the young their tricks for getting away with breaking the law.
Which group will lobby governments more effectively: public sector prison guard unions or private prison operating companies? California Governor Gray Davis certainly showed how unions can buy government influence with millions of dollars.
Posted by: Randall Parker at Jun 13, 2005 5:39:29 PM
Does anyone else notice this discussion thread sounds much like the debate over school choice or improving health care?
* We can't seem to come up with appropriate output metrics (arguing over what constitutes "success").
* We argue that comparisons can’t be made because the inputs aren’t the same (the patients, students and prisoners are never perfectly equal so it's not fair to compare outcomes).
* Lacking these definitions, the authorities writing the outsourcing contracts (legislators and regulators) define quality as replicating the existing system, constraining new entrants and stifling innovation.
The real problem is we haven't come up with a definition of quality for these items that allows for experimentation and innovation in their production. Likewise, we haven’t allowed providers to develop multiple definitions of “success”, allowing consumers to choose among competing service providers and declare winners in the marketplace.
If our government is the ultimate supplier of undefined goods and services, then it's no wonder the government sector consumes a massive amount of our GDP – with no change in sight.
Posted by: Kevin at Jun 13, 2005 7:37:40 PM
I have experience working in government contracting. In many ways it's like taking money from a retarded kid (with the retarded kid being the government managers).
If government contractors perform for less money than government without contractors, then it's only an amazing testimony to the incredibly inefficiency of government.
Posted by: Half Sigma at Jun 13, 2005 8:00:04 PM
We don't really understand what we are doing when we imprison people. We convey them into a beyond which is not rehabilitory or punitive. It has no moral existence either. Niether are these people disposed of or eliminated. They simply do exist in a context we have not yet bothered to identify. The law is exhaustively justified in terms of the context of guilt or innocence. What happens to the guilty is utterly undefined. They are simply held. To then transport this action for which we have no meaning, to a paid extingency would seem very unwise. But I am not sure that anyone really cares about people in prisons. And so perhaps it does not matter.
Posted by: exclab at Jun 13, 2005 8:13:26 PM
"make the contracts "cost plus" with the "plus" being inversly proportional to sentence length, and give healthy bonuses pegged on percentage of former inmates who do not repeat offend 6 mo/1 yr/2 yrs after release. Perhaps demand discounts for housing repeat offenders."
Posted by: Doug
Not unreasonable. For us, of course. For the prison company, that would be far, far too much trouble. It'd be far easier to bribe (excuse me, lobby) the government for a sweet contract that had lots of incentives, and no downside risk. In addition, there's another layer of information blockage, which suits both the prison company and corrupt government officials.
I think that, in the final analysis, people need to ask why could/would a private contractor do the job more efficiently than a government agency? If we can't get the government officials and politicians to do the job properly, how can we get a company to do so, when our only path of control is through those same officials and politicians? We're just adding a couple more layers of information loss and control difficulties.
Posted by: Barry at Jun 14, 2005 9:28:23 AM
Focus on the outputs -- and open the debate about alternative goals, and tradeoffs. (Higher reading scores but more expensive, or cheaper?)
It's gov't outsourcing, and almost all gov't should be outsourced. A huge gain is the inevitability of writing out an explicit contract -- a genuine "social contract" with duties and responsibilities on both sides (prison and gov't payer). The increase in transparency possible by the web is huge: make all contracts visible
The horrible current "social contract" is: the gov't decides how much of what it will give, and how much it will cost you (or somebody else). For the market to work, there must be different "prison management companies". The gov't "seller" of prisoners must have at least a couple of potential "buyers".
This answers Barry's question of why gov't regulation of private business is better than full gov't ownership -- gov't can't easily change management when it is gov't owned. A small scandal (rape causing AIDS?) in a gov't prison ... mostly nothing. In a private prison, the management can get sacked by the gov't politicians "looking tough".
The fact that private prisons have an incentive keep drugs illegal is a huge problem.
Posted by: Tom Grey - Liberty Dad at Jun 14, 2005 11:37:04 AM
"why should we expect government to do a better job at writing contracts?
Because the functioning of the private system is based on the contract, which can be improved annually. Mistakes are blamed on the wrong wording.
The functioning of the gov't system is based on "electing the right person" -- which doesn't usually offer long term improvements. Mistakes are blamed on the wrong person.
It's the difference between rule of law (words), versus rule by kings (benign dictators are best?).
Posted by: Tom Grey - Liberty Dad at Jun 14, 2005 11:41:32 AM
Private companies aren't just magically efficient, (as everyone here knows) they're efficient because they are vulnerable to the market forces created by self-interested consumers. I don't think the government is capable of providing those forces for any length of time. Problem 5 is insurmountable.
All privatization does is give some of the players a profit motive in addition to the usual motives of power and empire building. Then we end up with a sort of prison-industrial complex in which government policies are increasingly influenced by the people getting paid to implement those policies. No wonder so much of our population is in prison.
This leads me to a modest proposal: Put the IRS in charge of the prison system. They have an incentive to let people out if they are likely to become productive and taxable members of society.
Posted by: Mark Draughn at Jun 14, 2005 12:55:33 PM
"Private companies aren't just magically efficient, (as everyone here knows) they're efficient because they are vulnerable to the market forces created by self-interested consumers."
A good way of wording it. When there is only a single consumer, the government, and the government managers doing the consuming are morons who couldn't find better jobs in the private sector, then where is the efficiency?
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