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

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Author Info

  • Oliver Hart
  • Andrei Shleifer
  • Robert Vishny

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.

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Bibliographic Info

Paper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1778.

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Date of creation: 1996
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Handle: RePEc:fth:harver:1778

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