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

Author

Listed:
  • Oliver Hart
  • Andrei Shleifer
  • Robert W. Vishny

Abstract

When should a government provide a service in-house, 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 has. However, the private contractor's incentive to engage in cost reduction is typically too strong because he ignores the adverse effect on noncontractible quality. The model is applied to understanding the costs and benefits of prison privatization.

Suggested Citation

  • Oliver Hart & Andrei Shleifer & Robert W. Vishny, 1997. "The Proper Scope of Government: Theory and an Application to Prisons," The Quarterly Journal of Economics, Oxford University Press, vol. 112(4), pages 1127-1161.
  • Handle: RePEc:oup:qjecon:v:112:y:1997:i:4:p:1127-1161.
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    File URL: http://hdl.handle.net/10.1162/003355300555448
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    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government

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