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

58 Pages Posted: 8 Jan 1997  

Oliver Hart

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

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 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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Robert W. Vishny

University of Chicago - Booth School of Business ( email )

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312-702-0118 (Fax)

National Bureau of Economic Research (NBER)

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