The Proper Scope of Government: Theory and an Application to Prisons
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CitationHart, O., A. Shleifer, and R. W. Vishny. 1997. The Proper Scope of Government: Theory and an Application to Prisons. The Quarterly Journal of Economics 112, no. 4: 1127–1161. doi:10.1162/003355300555448.
AbstractWhen 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.
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