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

Quarterly Journal of Economics, Vol. 112, No. 4, November 1997

Posted: 28 Apr 1998

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)

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Abstract

When should a government provide a service in-house, 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 has. 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.

JEL Classification: H11, L33

Suggested Citation

Hart, Oliver D. and Shleifer, Andrei and Vishny, Robert W., The Proper Scope of Government: Theory and an Application to Prisons. Quarterly Journal of Economics, Vol. 112, No. 4, November 1997, Available at SSRN: https://ssrn.com/abstract=75508

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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HOME PAGE: http://www.economics.harvard.edu/~ashleife/

National Bureau of Economic Research (NBER)

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European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
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1000 Brussels
Belgium

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

Robert W. Vishny

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
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312-702-0118 (Fax)

National Bureau of Economic Research (NBER)

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