Do Private Prisons Really offer Savings Compared with their Public Counterparts?



Private contracting of public services has been alleged to reduce costs. We address the critical question of whether private contracting really saves money, using the US prison privatisation experience as an example. Although the consensus in the literature identifies such savings, we raise economic issues of incomplete contracting, asymmetric information and moral hazard, which complicate matters. We discuss explicit, implicit, and agency costs that show that measuring the savings and quality impact of private contracting is more challenging than the literature suggests, and often inconclusive. This may suggest caution in designing solutions to cost pressures.