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

Oliver Hart, Andrei Shleifer, Robert W. Vishny

NBER Working Paper No. 5744
Issued in September 1996
NBER Program(s):Corporate Finance, Public Economics

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.

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Document Object Identifier (DOI): 10.3386/w5744

Published: Quarterly Journal of Economics, Vol. 112, no. 4 (1997): 1126-1161. citation courtesy of

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