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