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

Oliver D. Hart, Andrei Shleifer and Robert W. Vishny

No 5744, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D23 H11 (search for similar items in EconPapers)
Date: 1996-09
Note: CF PE
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Related works:
Working Paper: The Proper Scope of Government: Theory and an Application to Prisons (1996)
Journal Article: The Proper Scope of Government: Theory and an Application to Prisons (1997)
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