58 Pages Posted: 8 Jan 1997
Date Written: September 1996
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: 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