Working Paper: NBER ID: w5744
Authors: Oliver Hart; Andrei Shleifer; Robert W. 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.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| type of provider (private versus public) (H42) | incentives for quality improvement (L15) |
| type of provider (private versus public) (H42) | incentives for cost reduction (D61) |
| private contractor's incentive to reduce costs (L33) | non-contractible quality (L15) |
| adverse consequences of non-contractible cost-cutting (D23) | efficiency of in-house provision (L33) |
| public corruption (H57) | decision towards excessive privatization (L33) |
| interests of public employees (J45) | decision towards privatization (L33) |
| mode of provision (H42) | quality of service (L15) |