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

  title={The Proper Scope of Government: Theory and an Application to Prisons},
  author={Oliver Hart and Andrei Shleifer and Robert W. Vishny},
  journal={Microeconomic Theory eJournal},
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… 
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