The Proper Scope of Government: Theory and an Application to Prisons

58 Pages Posted: 8 Jan 1997 Last revised: 4 Oct 2010

See all articles by Oliver Hart

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)

Andrei Shleifer

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)

Multiple version iconThere are 2 versions of this paper

Date Written: September 1996

Abstract

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.

Suggested Citation

Hart, Oliver D. and Shleifer, Andrei and Vishny, Robert W., The Proper Scope of Government: Theory and an Application to Prisons (September 1996). NBER Working Paper No. w5744, Available at SSRN: https://ssrn.com/abstract=3629

Oliver D. Hart (Contact Author)

Harvard University - Department of Economics ( email )

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Andrei Shleifer

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

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Belgium

HOME PAGE: http://www.ecgi.org

Robert W. Vishny

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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