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

  • Oliver Hart
  • Andrei Shleifer
  • Robert W. Vishny

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5744.

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Date of creation: Sep 1996
Date of revision:
Publication status: published as Quarterly Journal of Economics, Vol. 112, no. 4 (1997): 1126-1161.
Handle: RePEc:nbr:nberwo:5744
Note: CF PE
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