Private Prisons

I'm a fan of privatisation. But prisons would be low on my "Things to privatize tomorrow" list.

Andrei Shleifer's brilliant "State versus Private Ownership" argues that we want state ownership in the following kind of case (quoting from the paper):

1. opportunities for cost reductions that lead to non-contractible deterioration of quality are significant;
2. innovation is relatively unimportant;
3. competition is weak and consumer choice is ineffective; and,
4. reputational mechanisms are also weak.

What about prisons? A lot of the current worries in New Zealand about private-public partnerships on prisons focus on that the private prison might pay low wages and achieve poorer results, but that's not really a problem in the Shleifer world. Why? Quality of guards, or at least their pay, is contractible. If the government wants to make sure a private prison hires high quality guards, they can write that into the terms of the PPP contract. More importantly, the government can contract for outcomes as well as outputs: write into the contract that the prison is paid a bonus for every prisoner who does not reoffend for some period after release. Make the bonus large enough, and prisons will have a strong incentive to innovate in prisoner rehabilitation. It's damned hard to think of any of the standard critiques about private prisons that can't be solved through reasonable contracting, and it's easy to imagine lots of innovative upsides through creative contracting.

But they can't solve this one. The League of Ordinary Gentlemen (HT Wilkinson) points to NPR reporting on the corrupt interaction of the private prison lobby with legislators to throw more people into prison. It turns out that private prison lobbying was behind Arizona's rather nasty policy towards illegal immigrants.

Last year, two men showed up in Benson, Ariz., a small desert town 60 miles from the Mexico border, offering a deal.

Glenn Nichols, the Benson city manager, remembers the pitch.

"The gentleman that's the main thrust of this thing has a huge turquoise ring on his finger," Nichols said. "He's a great big huge guy and I equated him to a car salesman."

What he was selling was a prison for women and children who were illegal immigrants.

"They talk [about] how positive this was going to be for the community," Nichols said, "the amount of money that we would realize from each prisoner on a daily rate."

But Nichols wasn't buying. He asked them how would they possibly keep a prison full for years — decades even — with illegal immigrants?

"They talked like they didn't have any doubt they could fill it," Nichols said.

That's because prison companies like this one had a plan — a new business model to lock up illegal immigrants. And the plan became Arizona's immigration law.

Public prisons have slacker incentives on this margin: the prison manager can consume perquisites proportionate to discretionary budget, but can't easily translate that into income.

I don't expect PPP arrangements for prisons in New Zealand to lead to prison lobbying for draconian legislation. It's too easy to monitor that kind of thing in a small country. And the upsides if the contracting is innovative are really large. But it's still enough to put prisons close to last on my "to privatize" list. At the margin, it helps push for putting more people in prison and against liberalizing laws against victimless crimes.