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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 W. Vishny

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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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Publisher Info
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
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Handle: RePEc:nbr:nberwo:5744

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Find related papers by 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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This page was last updated on 2009-11-14.

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