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When Public-Private Misalign: The Case of Private Prisons

Kauffman researcher Emily Fetsch examines why private enterprise does not always prove to be the solution to public problems.

We tend to think private enterprise and entrepreneurship as innovative forces capable of fixing the inefficiency of public services. Yet, privatization of prisons in the United States has failed to deliver on their promises to improve upon public prisons. The poor state of private prisons is a sign that not every public function should be outsourced to private agents, and in this post I explore the evidence on the topic.

Analysis of private entities engaging in public goods expands beyond the realm of prisons. Clearly, private and public engagement can be beneficial to society. However, some issues can lead to contentious discussion about the interaction of private and public spheres. Some examples of this discussion include health care, charter schools, and for-profit higher educational institutions. Of course, public-private incentives can align in many cases and lead to tremendous successes. But we can not always predict the winners and should consider that some are very successful, while others are not.

Photo courtesy of Les Halnes via Flickr.

The first private prisons were established in the 1980s, in response to high levels of incarceration, as well as the privatization of government services. The overcrowding of prisons was creating maintenance problems, which was a factor in the rising cost per prisoner, and played a role in both state and federal government’s consideration of private alternatives to the prison system.

The growth of private prisons since the initial surge in the 1980s has been staggering. In 2004, there were five private prisons in the U.S.; in 2014, there were one hundred. Over 130,000 prisoners were located in private prisons in 2013 and they housed 8 percent of the total prison population in the United States. In 2013, nearly one-third of prisoners under federal jurisdiction were held in private prisons.

Proponents believed the emergence of private prisons and the inevitable business competition that followed would help address the need for more prisons, as well as help to reduce incarceration costs. For example, prisons could be created to tailor to particular prison populations: specialized prisons might house inmates with mental health issues, or HIV/AIDS, instead of having to meet a broad range of incarcerated needs.

Private prisons were created to be an innovative and cost-effective alternative to the public prison system. However, private prisons are failing to provide the innovation for which they were originally developed. Private prisons have more acts of violence within the prison, more prison escapes, and higher employee turnover than their public counterparts.

Additionally, despite the promotion of private prisons as a financially responsible alternative, they might not prove to be a cost-effective solution. The Bureau of Justice Assistance says private prisons provide an advantage, as “private entrepreneurs can build facilities faster and cheaper than the government,” as well as reduce operational costs. Although private prisons are promoted as being independent from government, they are given large subsidies at the local, state and federal level. Among the sixty private prisons with more than 500 beds (which includes “half of the U.S. private-prison market”), almost three-in-four (73 percent) received a development subsidy. Nearly four-in-ten (38 percent) “received property tax abatements or other tax reductions.” If a primary goal of private prisons was to reduce the cost of incarceration, then the government should only provide subsidies if prisons are meeting standards and remaining cost effective and with proper conditions for inmates. The government should be more engaged than they are currently in monitoring the process and results of private prisons. Furthermore, the subsidies given to the prisons might be better invested in community services known to deter crime (e.g., mental health services, drug rehabilitation, and investment in education).

As a result of mandatory drug sentencing reform, incarceration is projected to decrease dramatically. Private prisons are beginning to see fewer beds filled.  This highlights another major problem with private prisons—their business model and the misalignment of incentives between the public and the private. Private prisons are incentivized to have prisoners for longer and more often. In other words, private prisons benefit from “repeat customers.” This is a dangerous misalignment of incentives, as it is in the best interest of the public to have prisoners recover, rather than be stuck in prisons without recovery. The primary goal of businesses is to make money. The primary goal of prisons should be rehabilitation. In the context of private prisons, these disparate goals raise many concerns and would benefit from further study.

Private prisons were created to be cost-effective alternatives to the public prison system. However, due to their inefficiency, reliance on government subsidies, and business model misaligned to public interest, they have failed to innovate and gain a competitive edge over the public prison system. Their failure to improve upon the established system highlights that, despite the potential advantages of private engagement, private enterprise does not always prove to be the solution to public problems.