The Proper Scope of Government: Theory and an Application to Prisons
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)
Robert W. Vishny
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)
NBER Working Paper No. w5744
When should a government provide a service inhouse and when should it contract out provision? We develop a model in which the provider can invest in improving the quality of service or reducing cost. If contracts are incomplete, the private provider has a stronger incentive to engage in both quality improvement and cost reduction than a government employee. However, the private contractor's incentive to engage in cost reduction is typically too strong because he ignores the adverse effect on non-contractible quality. The model is applied to understanding the costs and benefits of prison privatization.
Number of Pages in PDF File: 58
Date posted: January 8, 1997
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