51 Pages Posted: 23 Apr 2014
Date Written: March 10, 2014
When governments outsource work to private entities — running prisons and schools, administering state benefits, and the like — they tend to write extremely detailed contracts. The conventional thinking is that these private entities need to be constrained lest they act opportunistically. Therefore, governments write contracts that highly specify tasks, contain robust monitoring provisions, and financially reward task compliance. This detailed contracting approach, which views agents as selfish, profit-driven, and looking for opportunities to shirk, finds support in both the agency cost and public law literatures.
This Article challenges the prevailing approach. It argues that control-based contracts are not only difficult and expensive to write and costly to monitor, but they stifle intrinsic motivation and innovation. Such detailed contracts frequently fail in practice, with serious negative implications for the public.
Recent literature in behavioral economics suggests that the conventional approach is actually premised on a misunderstanding of human nature. Experiments on the positive reciprocity norm — meaning that people reward kind actions — have shown that less complete contracts induce higher effort levels and a more cooperative principal-agent relationship than the traditional approach. This Article incorporates this behavioral research and studies of real world behavior to present an interdisciplinary argument for why the traditional public-private contracting approach should be rethought both in theory and in practice.
Keywords: contracts, public-private, behavioral economics, reciprocity
Suggested Citation: Suggested Citation
Epstein, Wendy Netter, Public-Private Contracting and the Reciprocity Norm (March 10, 2014). American University Law Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2427308