Saturday 30 October 2010

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.


  1. Jesus Christ, there is NOTHING WRONG with Arizona's immigration laws!

    How is asking State police to simply enforce the law a bad thing? It's already the law that you can't be in the US without a proper visa. People who are in the US without a visa are ALREADY BREAKING THE LAW!

    And you are saying State cops shouldn't be allowed to enforce a Federal law? Ever?

    You are also mad if you think that these mad people and their mad schemes had ANY effect on Arizona legislators. Nobody wants to imprison illegals, they want to SEND THEM HOME.

    You can believe in more immigration all you want, but if you can't secure your borders, it's a waste of time having ANY immigration policy.

  2. It isn't as if the publicly run prisons didn't serve anyone's economic agenda. The prison guards in California have one of the most powerful unions in the state, with a tremendous influence on elections and legislation. Government bureaucracies are organized economic interest groups just as much as private corporations are

    It's not clear to me, however, that subcontracting to private business is either better or worse than relying on government bureaucracy in performing the functions that I think government really does have to perform. Either way, you have to deal with most of the same problems: the tragedy of the commons and the resulting rational ignorance of voters, principal/agent issues, the logic of collective action (as discussed, for example, by Mancur Olson), and rent-seeking, among others.

    I think it's safe to say that we don't really have a fully effective solution to those in political theory or the art of government.

  3. @blair I guess we'll have to disagree on the merits of racially targeted stop and search, papers please and whether same is consistent with "give us your poor, your tired, your huddled masses...".

    @michael agreed on prison unions...

  4. There is a passage somewhere in 'Wealth of Nations' where Smith expresses the view that if you decide that a service should be provided by the public sector then contracting it back out is just dumb. The guts of his argument is the inevitable corruption of legislators and/or government officials.

    I realise that the discussion of this subject amongst modern economists involves many subtleties, but as I see it there are three scenarios:
    - Contracting out has been tried and the effects of corruption have been clearly observed (your Arizona example)
    - Contracting out hasn't been tried and some folk imagine that if they can't think of a way to corrupt the process then nobody else will.
    - Contracting out has been tried and the corruption has not been exposed yet

    There seems to be a belief that 'privatising' public services confers free market benefits. Only the free market does that.

    As Michael points out there is no perfect way of managing anything done by the public sector. The important thing is keep those tasks to a minimum. Then keep the residual tasks in house so that it is less easy for legislators or officials to disclaim knowledge or responsibility.