government and market pathologies of privatization: the case of prison privatization

Government and Market Pathologies ofPrivatization: The Case of Prison Privatization1

John C. MorrisOld Dominion University

The recent growth in the number of privately operated and privatelyowned prisons in the United States focuses our attention on the nature ofthe privatization arrangements employed in this setting. This articleargues that the privatization of correctional facilities is best understoodas a combination of government failures, market failures, and politicalincentives. Using a case-study approach to examine prison privatizationin Mississippi, the article concludes that prison privatization not onlyfails to correct certain government or market failures, but also actuallycreates additional (hybrid) pathologies that combine elements of bothgovernment and market failures.

A growing trend in the United States is the use of private sectorfirms to carry out traditional government functions. Services such asgarbage collection, street repair, janitorial and maintenance services(Savas 2000), and wastewater treatment (Heilman and Johnson 1992)are common at the local level of government, and the state and nationalgovernments have privatized services ranging from public housing(Kingsley 1991) to nuclear waste disposal (Kettl 1993).

A resurgent trend in privatization is in the area of corrections.Although our nation’s history has seen the operation of private prisonsin its past (Durham 1994; Feeley 1991), the late twentieth centurywitnessed the rebirth of private prisons. While there were only abouttwo dozen private prison facilities in the United States in 1985 (Savas1987, 186), recent estimates place the current figure at more than 130prisons spread across the country (Brooks and Greene 1997, S3).Moreover, at least one state—Tennessee—has considered theprivatization of its entire correctional system.

Much of the debate over private prisons, as with many otherservices offered for privatization, tends to focus on issues of efficiencyand cost effectiveness. Generally, the debate revolves around real orperceived claims of lower cost, higher quality, and greater efficiencyachieved through the competitive forces of the marketplace. Studiesabound to support or refute these arguments.2 Indeed, much of the

Politics & Policy, Volume 35, No. 2 (2007): 318-341. Published by Blackwell Publishing Inc.© The Policy Studies Organization. All rights reserved.

literature on prison privatization tends to focus on the same corearguments. While monetary savings and economic efficiency arecertainly important in today’s policy world, prison privatization raisesan additional issue not typically found in other service areas: thecoercive power of the state.

In this article I argue that the privatization of correctional facilitiesis best understood as a combination of government failures and marketfailures. While traditional analyses of privatization tend to focusprimarily on government failure as the justification for privatization,few tend to focus on either potential market failures in place toencourage (or discourage) privatization in a particular policy area.3

Finally, privatization arrangements that fail to account for certainmarket and government failures may actually create hybrid “failures,”thus creating entirely new pathologies for privatized arrangements. Thefocus of this analysis is the privatization of a portion of the statecorrections system in Mississippi. The state is a relative newcomer to theuse of private prisons, which has allowed Mississippi to draw on awealth of experience from other states. Mississippi approached theprivatization decision somewhat cautiously, and there is evidence thatsome attention was paid to preventing certain market (and government)pathologies. The theoretical “lenses” employed in this article are drawnfrom the literature in policy analysis, as well as from the broaderliterature in privatization. I will examine the privatization of prisons asan example of government failure, market failure, and the interplay ofpolicy incentives.

This research is important for two reasons. First, prisonprivatization is a growing topic in many states, and a growing marketopportunity for many. State governments face increasing inmatepopulations and growing costs, and pressure from citizens grows forstate legislatures to find ways to stretch tax dollars further. Indeed,privatization offers legislatures an attractive solution, in that prisonprivatization appears to reduce the size of government, saves thestate money, and allows a “get tough on crime” stance. Second, thisarticle will offer an alternative method of analysis for privatizedarrangements. Rather than employing methods that search for (orassume) government failure, this study draws on an analysis of bothgovernment and market pathologies that effect the privatizationarrangement.

Morris Pathologies of Privatization 319

Privatization and Corrections

There is no shortage of literature related to the topic of prisonprivatization. Likewise, the debate over prison privatization hascrossed disciplinary lines, and includes works by economists,sociologists, political scientists, criminologists, management theorists,legal scholars, and public administrationists, to name a few. In spite ofthe wealth of work in the field, there appears to be little diversity ofapproach or of findings. Much of the work in this field falls into one oftwo broad categories—the “privatization is good” category (Bennettand Johnson 1981; Cikins 1986; Fenton 1985; Haller 1986; Krajick1984; Logan 1992; Savas 1987; Thomas 1995), and the “privatization isbad” category (AFSCME 1983; Bayer and Pozen 2005; Bowditch andEverett 1987; Field 1987; Moe 1987; Poole 1983; Porter 1990; Price2006; Shichor and Sechrest 1995). Within those broad categories,however, is a range of justifications for their claims. Those in favor ofprison privatization typically point to perceived failures of government,and the ability of the private sector to address these failures. Inefficientuse of resources in the public sector, for example, means better serviceat a lower cost in the private sector (Bennett and Johnson 1981;Calabrese 1993; Savas 1987), and thus a substantial cost savings(Crants 1991; Guzek 1992). Likewise, the inflexibility of governmentagencies can also impose costs that reduce efficiency (Logan 1990;Mullen 1985). Yet another group offers more normative stancesconcerning the proper role for government (Hart, Shleifer, and Vishny1997; Henig 1985; Logan 1987, 1990; Nicholson-Crotty 2004; Savas2000), arguing for a smaller, less-intrusive government (and, therefore,a more robust, less-regulated private sector). Opponents of prisonprivatization typically focus on issues such as the role of the state asjustification for their opposition (DiIulio 1988). Interestingly, little ofthe extant literature focuses attention on the status of prisons as public(or collective) goods. It rather turns attention to more normativestances concerning the role of the state (Donahue 1989; McDonald1990; Milward and Provan 2000; Moe 1987; Robbins 1988; Schaffer1996; Van den Haag 1975). These works draw attention to the issuesassociated with a reduction of the capacity of government. Others pointto problems of monitoring and accountability (Durham 1994; Johnson1990; Keating 1990).

320 Politics & Policy Vol. 35 No. 2

A second look at the literature reveals a range of important issuesand concerns raised by both proponents and opponents ofprivatization. One of the most oft-cited concerns is that ofaccountability (Bayer and Pozen 2005; Price 2006; Price and Riccucci2005). Specifically, the incarceration of inmates is seen as a criticalfunction of government, and thus requires close monitoring bygovernment to ensure that the wishes of government are carried out bythe private company (Breaux et al. 2002; Donahue 1989; Gentry 1986;Harding 1994; Logan 1987; Moe 1987). The fundamental issue for thisgroup is the ability (or willingness) of government to effectively monitorthe activities of the private sector in a privatized arrangement, and toensure the interests of the state are met by the contractor (Johnson andWatson 1991; see also Hart, Shleifer, and Vishny 1997).

Others raise a variety of legal (Mayer 1986; Spurlock 1987; Thomas1991) and constitutional (DiIulio 1990; Field 1987; Gilbert 1996;Lawrence 1986; Robbins 1991) questions concerning prisonprivatization. On the legal side, the major concerns address the liabilityof the state or private company (Thomas 1987) in prison privatization incases of inmate injury or death (Johnson 1986; Spurlock 1987) or incases involving the violation of an inmate’s civil rights (Dunham 1986;Glover and Fox 1990; Thomas and Calvert-Hanson 1989). Others(Pelton 1986) raise issues concerning the application of labor laws andother federal mandates to privately operated prisons. Yet anothergroup is concerned with the negative effects of prison privatization onpublic employee unions (AFSCME 1983; Bennett and DiLorenzo1983). The constitutional issues tend to be more sweeping in nature, andaddress the right of the state to assign certain functions to the privatesector (Moe 1987; Robbins 1988; Schaffer 1996).

In sum, there is no shortage of either scholarly work or popularopinion on this topic. While the definition of strengths or weaknesses ofprivatized arrangements differs widely, there is little noticeable effortto move beyond a singular approach to synthesize the arguments madeby each side.4 The following sections seek to define the issues raisedin the literature in terms of government failures and market failures,and to examine those failures in light of a specific case of prisonprivatization.


Government FailuresAs noted, one of the most oft-cited justifications for privatization

is that of government failure. Put simply, government failure refers toany one of a range of potential shortcomings in the process andadministration of government. Weimer and Vining (1992, 143) offer anexcellent summary of the major arguments; of particular interest in thisarticle are the problems inherent in bureaucratic supply, as these issuesare most often raised in privatization debates. The bureaucratic supplyproblems relevant to the current analysis are difficulties in valuingoutput, limited competition, and civil service protections (inflexibility)(143). In general terms, government failures are often touted asjustification for privatization (Kettl 1993; Savas 1987; Weimer andVining 1992). By involving the private sector in the production ordelivery of a good or service traditionally handled by government,government can tap into the efficiencies of the market, particularlyby addressing the problems of bureaucratic supply (Savas 1987).Privatization creates (or expands) markets, thus creating (or expanding)competition. Civil service protections are irrelevant to privatecompanies, resulting in greater flexibility. Furthermore, marketproponents argue, the agency problem does not exist in the privatesector, as a diversion of resources means lost profit for a privatecompany. Efficiency is increased; markets mean competition (which, inturn, offers greater efficiency, lower price, and higher quality); andprivate companies are free to innovate and restructure (increasedflexibility) to stay competitive. Each of these can be found in prisonprivatization: managing prisons is an administrative function, andadministrative outputs are often difficult to measure; when governmentbuilds and operates prisons there is no market competition to encourageefficiency; and rules and regulations add significant additional costs toservices provided by government.

Market FailuresThe other broad category of shortcomings is termed market

failures, defined as imperfections in the market that hinder the efficientand effective operation of markets. Weimer and Vining (1992) offerseveral categories of market failure, including the nonexcludability ofpublic (collective) goods, natural monopolies; and informationasymmetry (a consequence of the principal–agent problem) (93, 132).


Each of these has a potential role in prison privatization: Prisons areoften defined as collective goods (see Savas 2000); long-term contractscreate virtual monopolies, and principal–agent relationships are rifewith information asymmetry (Breaux et al. 2002; Kettl 1993).

In spite of the tendency for analyses of privatized arrangements totreat these categories separately, the distinction between “market” and“government” failures may not be entirely clear. Pathologies typicallyidentified as “government failures” may also be found in marketsettings, and vice versa. If, as Heilman and Johnson (1992, 190) suggest,successful privatization is indeed a paradox in that “[t]he private sectorbecomes more like the public sector than the reverse,” then we mightexpect privatized arrangements to exhibit elements of both marketfailure and government failure. This may be especially true when thegood or service privatized represents a core function of government (seeDiIulio 1988), and/or when that function involves the coercive power ofthe state. The only entity given coercive power in the modern state isgovernment; only government can legitimately hold someone againsttheir will, deprive a person of their freedom, or deprive one of life (Vanden Haag 1975). In fact, private citizens who exercise these coercivepowers often become the subject of government’s coercive power.Shicor and Sechrest (1995, 460-1) summarize these concerns in twopoints. First, prison is a form of social punishment, and is itself a moraland ethical issue. Second, prisons serve as a symbol of the coercivepower of the state. They conclude that “[a]ccordingly, the symbols ofauthority convey that society, through its representatives, exercises itslegitimate authority to punish those who violate its laws. Thus it seemsthat it does make a difference what badge the officer wears in thefacility” (461).

As the function under scrutiny moves closer to this core, we mightexpect the nature of a privatization arrangement to better protectgovernment’s interest, even at the expense of the inclusion of certaingovernment (or market) failures into the arrangement. Thesepathologies might manifest themselves in terms of broadenedaccountability mechanisms to address the principal–agent problem(Donahue 1989), greater emphasis on information sharing to addressinformation asymmetries, and difficulties in valuing output.

Different sides in a privatization debate will point to perceivedfailures of the opposing side as justification for their own position.


Important policy decisions are made on the basis of these perceptions,thus they become important to the policy analyst. As noted in aprevious section, the privatization of prisons provides a compellingsetting for the examination of government and market failures, and theways in which these purported failures play out against one another ina privatized arrangement. The following case study examines the forcesarrayed in the privatization decision, and considers the role of thesefailures in the structure and operation of the privatized arrangements inMississippi. This case is analyzed in terms of the arguments for each ofthe aforementioned “failures,” the mechanisms emplaced to mitigatethose failures, and the political incentives shaping the terms of thedecision.

Private Prisons in Mississippi

The recent growth in public spending for corrections in Mississippi,as in many states, has alarmed state policy makers and citizens alike.Since Financial Year (FY) 1986, the annual state budget for theMississippi Department of Corrections (MDOC) has risen over 300percent, from $87.2 million to $292.6 million in FY 2006 (adjusted forinflation, 2006 dollars).5 In addition, the population served by MDOChas grown from roughly 16,000 in FY 1986 to about 52,000 in FY 2006.The growth in incarcerated inmates has also risen substantially, from6,750 in FY 1986 to about 27,000 in FY 2006.6

The latter portion of the 1980s saw a series of pressures onMississippi’s correctional system. First, the state was under a courtorder (in Gates v. Collier) to relieve poor conditions and overcrowdingin both state facilities and county facilities used by the state. The state’smain facility at Parchman was in poor repair, and was ill equipped tohandle the growing inmate population. Second, a steady growth in thereported crime rate and citizen calls to “get tough on crime” led to aseries of reforms, culminating in the state’s “truth in sentencing” lawspassed in July 1995. These laws were intended to keep convicted felonsin prison for a greater portion of their sentence. Third, growingdissatisfaction with the operation of the state’s Parole Board created amovement to reduce the number of convicted felons eligible for parole,thereby reducing the role of the Parole Board.


At the same time, Mississippi was beginning to reap the benefits ofincreased revenues from casino gambling, providing the legislature withadditional funds for capital infrastructure development. Fundingauthority was granted for the second in a series of new facilities in 1985,which resulted in the opening of the South Mississippi CorrectionalInstitution in 1989.7 As the inmate population continued to grow,construction of an expansion facility at the Central MississippiCorrectional Facility was begun in 1993, and opened in 1995.

Even with the additional facilities, the projected growth in theinmate population would soon outstrip the available beds in the state’scorrectional system. With the legislature unable to reach a solution in itsregular session, the governor called a Special Legislative Session in thesummer of 1994 for the purpose of addressing the impending prisoncrisis. The result was Senate Bill 2005, passed during the FirstExtraordinary Legislative Session of 1994. The resulting legislationcreated a temporary board of elected state officials known as StatePrison Emergency Construction and Management Board, (SPECAM)consisting of the Attorney General, the Lieutenant Governor, and theState Treasurer. The legislation gave SPECAM broad authority toaddress the impending problems, including the following:

• enter into contracts with private companies for the incarceration ofstate inmates;

• adjust the reimbursement rates for housing state inmates in countyjails;

• construct new state-owned facilities, or to expand existing statefacilities;

• house state inmates in tents;• house state inmates in private facilities located in states other than

Mississippi;• the early release of certain classes of eligible offenders; and• a limited exemption to a range of state laws related to procurement

procedures, construction requirements, and bidding laws.

Relevant to this analysis is SPECAM’s decision to contract withnonstate entities for the construction and operation of prisons. Thelegislation provided SPECAM with the authority to acquire and secureadditional prison facilities through contracts with the private sector.The law also required that any fees paid to nonstate entities for theincarceration of state prisoners must be a minimum of ten percent less


than the state’s cost to house comparable inmates. The state’s costwould be calculated by a system developed by the Joint LegislativeCommittee on Performance Evaluation and Expenditure Review(PEER), and audited by an independent accounting firm. Finally, thelegislation allowed the state to contract for the construction, purchase,or lease of a facility for a period not to exceed a term of 20 years, andrequired such contracts to convey the facility to the state at the end ofthe term for a nominal amount (one dollar).

At the time Senate Bill 2005 was passed, there were severalimportant political undercurrents present that shaped both the debateand subsequent legislation. First, the governor was an avowedproponent of privatization, and would regularly indicate so publicly.Second, the state was faced with a recent court settlement in a long-standing education funding equity suit, and there was a fear there wouldbe little bond capacity remaining for purposes other than education.Third, under pressure from citizens, the legislature had reduced statetaxes, replacing the lost tax revenue with new monies from casinogambling. Thus, the influx of gambling revenue was no longer availablefor new projects.

The SPECAM board issued a Request for Proposals (RFP) in late1994, asking for bids on a 1,000-bed, medium security prison facility thatwould house inmates in dormitory-style facilities. Six firms responded tothe RFP, and three firms were invited to make presentations toSPECAM. The initial contract was given to Wackenhut Corporation,based in Florida. Wackenhut immediately began planning andconstruction on the new facility in Holly Springs, some 35 miles southeastof Memphis, Tennessee. The facility began accepting inmates in June1996. A second contract was issued to Nashville, Tennessee-basedCorrections Corporation of America (CCA) for a similar facility inGreenwood, Mississippi, which opened in September 1996.

Although the two facilities are operated by private companies, thecontractual arrangements for each are quite different. The HollySprings facility was financed, designed, and built by Wackenhut. Thestate pays a per-inmate-per-day fee to Wackenhut, and the state iscontractually obligated to provide inmates to keep the facility at itsmaximum level of 1,000 inmates. The state also pays the debt service onbehalf of Wackenhut, and will assume ownership of the facility at theretirement of the debt (in 2016).


The Greenwood facility uses a very different approach. Rather thanrelying on private financing, the state entered into an agreement withthe newly created Delta Correctional Facility Authority, a publicauthority authorized by the Leflore County Board of Supervisors. Theprison was financed using Industrial Development Bonds issued bythe authority, and the authority in turn contracts with the CCA for theoperation and management of the facility. Payments for the debt serviceare made by the state to the trustee bank on behalf of the authority, andthe state pays the management fee directly to the CCA.

A second form of facility created by Senate Bill 2005 is a series ofsmaller regional prisons. These facilities are built by counties, andcontain space for roughly 300 inmates. Most of the facilities approvedby the legislature are actually consortiums of counties that form anintergovernmental agreement for the construction, management, andoperation of the facility. The facilities are run by county sheriff’sdepartments, and the state contracts to provide at least 250 inmatesto each facility. Although the original legislation only authorized twosuch regional facilities, subsequent action has seen the number grow toten regional facilities. According to both state and county officialsinterviewed, counties view these facilities as a form of economicdevelopment, and there is a great deal of pressure placed on bothMDOC and the legislature to approve new regional facilities.8 Table 1summarizes the distinctive characteristics of the three differentprivatization models.

Analysis and Discussion

The preceding discussion lays out the context of prison privatizationin Mississippi. We now turn our attention to the specific pathologiesdelineated earlier in this article. The first pathology to examine is theprincipal–agent problem. Often defined as a market failure, theprincipal–agent problem concerns the steps necessary to ensure thatthe agent carries out its duties in the best interests of the principal (seeespecially Moe 1984; Pratt and Zeckhauser 1985). The problem, then, isfor the principal to induce the agent to act in its (the principal’s) bestinterests, rather than its (the agent’s) own. Most conceptualizations ofthis problem treat the principal–agent problem as a dichotomy; there isone principal and one agent, and each party fulfills one of those two


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roles. However, privatization may add another level of complexity tothe arrangement. At one level, government acts as an agent of society.When government provides a good or service, it does so as an agenton behalf of society. When government enters into a privatizedarrangement, however, government becomes a principal, and theprivate contractor becomes the agent. In essence, government mustadopt a dual role—agent of the people, but principal to the privatecontractor. Government’s role becomes less clear, and substantiallymore complicated than in a nonprivatized arrangement (see Breauxet al. 2002; Morris 1994). In addition, agents often act in anopportunistic manner; therefore, an important role of the principal isto prevent such behavior. In terms of privatization, monitoringmechanisms must be in place to discourage or prevent such behavior. Ina privatization arrangement, government may be faced with the task ofpreventing opportunistic behavior (a market pathology) as principal,while simultaneously engaging in opportunistic (rent-seeking) behavior(a government pathology) as an agent.9

These issues have been addressed through a variety of mechanismsin the Mississippi case. First, each of the private facilities has a positioncalled the State Contract Monitor. The job of the contract monitor is toact as the agent of the state onsite, and to act as the intermediarybetween the state and the contractor. The monitor is responsible forensuring that the terms of the contract are met; that all MDOC policiesand procedures are followed, and that the contractor meets allcompliance standards (discussed below). The contract monitor is anMDOC employee, and is a full-time employee located at the site. Themonitor inspects the facility daily, meets with both facility staff andinmates, and ensures the integrity of the security perimeter. The jobdescription for the position requires a person with substantialexperience as a state compliance officer, as well as a law enforcementbackground. To this point, MDOC has relied on Compliance Officersdrawn from the Mississippi Gaming Commission.10

The additional burden of monitoring to MDOC is relatively light.The contract monitors provide MDOC with onsite authority; themonitors in turn report to division heads within the functional areas ofMDOC (budget, security, personnel, etc.) as necessary. MDOC reportsthey added no new positions to monitor the activities of the privateprisons, with the exception of the aforementioned contract monitors.


Under the terms of the contracts, the salaries of the contract monitorsare paid by the contractors (although the contract monitors are stateemployees). Thus, MDOC has not incurred any additionaladministrative costs to fulfill the monitoring function. MDOC staff didnote the slightly increased workload associated with the addition of twonew prison facilities, but it appears the additional workload generatedhas been assimilated without additional administrative resources.11

A second accountability mechanism is the contractual requirementfor the contractor to achieve and maintain accreditation from theAmerican Correctional Association (ACA).12 The ACA accreditationprocess takes roughly a year, and includes a substantial and ongoingrecord-keeping effort on the part of the contractor. Furthermore, thereare some 300 standards required for accreditation, covering such diverseelements as quality of living space, availability of educational,vocational, and counseling facilities, a law library, nutritionalrequirements for meals, safety standards, security arrangements, and ahost of other elements. It is important to note that none of the state-operated facilities achieved ACA accreditation until 2002, and threeinstitutions were re-accredited in 2005.

The ACA standards also represent a concrete, straightforwardmethod to measure output. Because the standards are socomprehensive, they cover nearly every aspect of prison operation andmanagement, and thus discourage certain kinds of opportunisticbehavior on the part of the private operator. By ensuring ACAcompliance, the state can assure that the inmates housed in privatelyoperated prison facilities in Mississippi are likely to receive better carethan they would in state-operated facilities. This is not to say thatopportunistic behavior and rent-seeking do not occur; state officialsreport they regularly haggle with the contractors over billed chargesfor services, numbers of inmates, and other cost issues. In sum, theMississippi model requires the private sector to incur significant costs toassure contract compliance in pursuit of public accountability.

As specific as the contract might be, the contract does not requirethe contractors to make their financial records available to stateauditors, thus creating an asymmetry of information. Under the termsof Senate Bill 2005, the contracted price must be 10 percent less than thecalculated state price for housing similar inmates. Although statebudget figures and audit reports are a matter of public record, and thus


available to the private companies, the state has no way to know theprofit margin or the actual costs of the contractor. This places the stateat a disadvantage, as the state may be able to acquire the same servicesat a lower price. Thus, the asymmetry of information present may bethought of as a market failure, as well as a consequence of the termsof the principal–agent relationship, albeit one created by moving afunction from the public sector to the private sector.

The second pathology is the measurement of outputs. There aretwo potential dimensions to this issue. First, many privatizationarrangements include easily measurable outputs: number of clientsserved, number of potholes filled, or other similar measures. Otherkinds of privatization arrangements address goods or services not easilymeasured. Previous work (Morris 1994, 1997) has detailed the difficultyin measuring privatization outcomes when the service being measured isan administrative function. Prison privatization offers the same generalproblem: How does one measure the outputs of the arrangement? Ifone employs measures of quality, how is quality to be defined(or measured)? Is cost the only factor, or are other factors equally (ormore) important? If cost is most important, are we comparing costs forsimilar services, or are the populations being served somehow different(a question of eligibility)? Although difficulty in valuing output is agovernment failure, privatization of an administrative function can thustransfer the same pathology to the privatized arrangement.

Although elements of this issue are addressed as issues ofaccountability, the question of eligibility remains. At first glance, itwould appear that the population of inmates at the private facilitiesis identical to those in state custody—medium security, generalpopulation inmates. Upon closer inspection, however, there aresignificant differences in the populations, driven by a combination ofpolitical and cost pressures. First, the terms of the contracts state thatthe private contractor will be responsible for all medical costs incurredby inmates for the first 72 hours of an illness, after which the state willreimburse all medical costs. In addition, the state must pay for alllong-term medications required by inmates (such as insulin, AZT etc.).In reality, the state can save money by transferring ill patients to statecustody. The MDOC has negotiated Medicaid rates for its inmates withhospitals near state prison facilities, but the rates charged by hospitalsnear the private facilities are “full fare” rates. It is thus more cost-


effective for the state to transfer inmates with expensive medicalconditions back to state custody as quickly as possible. The statetherefore returns inmates with medical problems back to state custody,and keeps all of the inmates with known medical or psychiatricconditions in state custody.

Second, the private contractors have the right to reclassify aninmate’s security status, which may necessitate the return of an inmate tostate custody. This is most likely to happen when an inmate’s status ischanged from “B” custody (medium security) to “C” or “D” custody(maximum security). Reclassification can occur as a result of a RuleViolation Report (RVR), which is issued as a result of the failure of aninmate to comply with rules or orders from a staff member. The RVR isadjudicated by correctional officers on staff, who are (by design) allprivate employees. Although one of the two facilities has averagedapproximately one inmate per month returned to state custody forreclassification, the other facility has averaged more than ten per monthreturned to state custody. It must be noted that nearly half of all thosereturned stemmed from a single incident at the facility that resulted inserious injury to a correctional officer. Yet even without those countedfrom that incident, the rate is slightly more than five per month, whichrepresents a reclassification rate nearly twice as high as that experiencedin state-operated facilities. Thus, there is evidence of “cream-skimming”(Kettl 1988) taking place within these facilities, with the privatecontractors keeping only the least costly, least troublesome inmates.The state must assume responsibility for (and custody of) the mostcostly, most troublesome inmates. We may also conclude that theprincipal–agent problem and the measurement of outputs are inexorablytied together. Proponents and opponents of privatization alike espousethe benefits of measurable outcomes in the privatized arrangement,precisely because such measures deter opportunistic behavior andprovide some degree of accountability for the private agent.

The third pathology involves the potential flexibility of a privateactor. Many contend that privatization is more efficient (and thereforedesirable) because the private sector is not bound to many of the samerules and regulations that constrict the public sector. In other words, theprivate sector is not constrained by red tape to the degree the publicsector is constrained, nor is it bound by complex procurement laws orcivil service protections that limit the flexibility of managers. We would


thus expect a private agent to possess additional flexibility to operateoutside these constraints.

The evidence for this pathology is somewhat mixed. First, it is clearthat the private sector is not constrained by a civil service. However, theprivate sector experiences other kinds of personnel problems. The HollySprings facility, for example, experienced turnover rates of staff inexcess of 200 percent in its first 14 months of operation, in spite of arelatively high rate of unemployment in the area. Because ACAstandards require extensive training for correctional officers, the privatecompany has experienced significant training costs, and has suffered ashortage of qualified personnel at times.

On the second front, the private companies are clearly free to buyneeded materials on a market unconstrained by complicated andexpensive procurement laws. The companies regularly buy commoditieson the open market, and can offer certain economies of scale for itemsprocured by the corporate offices. On the other hand, the statelegislature has already shown a willingness to suspend procurementlaws to some degree; Senate Bill 2005 suspended applicableprocurement laws to allow SPECAM to take immediate action. Whilethere is clearly a trade-off between market efficiency and publicaccountability in this scenario, the state may be able to restructure itslaws to allow more efficient procurement.

The most obvious problem results from the presumed freedom fromcomplicated rules and regulations in the private sector. In this case, theprivate companies are required by contract to comply with all policiesand procedures of MDOC, as well as all requirements of the ACA. Inaddition, staff at both facilities report their own corporate offices expectcompliance with a host of company procedures as well. While theserequirements make good sense in terms of accountability (particularlyimportant in an area such as corrections), they clearly place a substantialadditional cost on the contractor. This problem is evidence of theparadox of privatization pointed out by Heilman and Johnson (1992), inthat privatization tends to make the private sector more like the publicsector than the reverse. The paradox, of course, is that the perceivedbenefits of privatization (addressing government failures) may be lost inan effort to prevent market failures in the same relationship.

Few would deny the inherent inefficiencies of bureaucracy, norwould they deny the inefficiencies of a civil service system or


voluminous rules and regulations. While these elements may have theirplace in public agencies, they are rarely thought of as evidence of marketefficiency. The recent growth in both the number of private prisons andthe number of companies offering such services is indicative of thepresence of a robust market, so the privatization of prisons seemsto address the problem of limited competition. Conversely, the use oflong-term contracts means that once a contractor is chosen, thatcontractor effectively enjoys a 20-year monopoly, during which time therelationship between the contractor and the state is not responsive tomarket changes and is thus insulated from competition. In effect, agovernment monopoly (a government failure) is removed in favor of aprivate sector monopoly (a market failure).

Finally, privatization creates an enhanced principal–agent problem(otherwise a market pathology) for government. Because governmentbecomes both a principal and an agent, the privatization arrangementbecomes the nexus of both government and market failures.Government must assure compliance of its agent and create incentivesto induce desired behavior (and discourage undesirable behavior) whilesimultaneously seeking enhanced efficiencies from the market. At thesame time government is merely an agent working on behalf of citizens,and must be responsive to the accountability needs of those citizens.Government thus finds itself in the rather odd position of actingsimultaneously as both a principal and an agent to accomplish the sameend.

Conclusion

The purpose of this article is to integrate the more commonconceptions of market and government failures, and to address the waysin which these different pathologies might actually serve to reinforceeach other in privatized arrangements. By reinforcing each other, theprivatization arrangement may not cure any of the pathologies, but maysimply transfer the pathology to the other sector without mitigating itseffects.

A number of important conclusions and insights may be drawn fromthis case. First, the common justification for privatization as a cure forgovernment failures is not always credible, especially for cases in whichthe good or service is a core function of government (such as prisons).


The public sector values imposed on the privatization arrangement,particularly the need for strong accountability mechanisms, may indeedcreate Heilman and Johnson’s (1992) paradox of privatization. Theserequirements are so important that government obligates the privateagent to adopt government’s stance, effectively compelling the privateagent to operate as if it were government, rather than government’sagent. Thus, government chases the “Holy Grail” of market efficiencies,hoping to make use of the private sector’s advantage, when in fact thatadvantage is mitigated or lost by the imposition of those pathologies thatappear to limit government action in the first place.

Second, we may infer that not all privatization arrangements, norall forms of privatization, are equal. The conundrum presented here is,I believe, more likely to be found in specific types of privatizationarrangements—those that represent core functions of government,those that involve the health, safety, and welfare of citizens, and thosethat involve management or administrative functions. Conversely, theprivatization of other goods and services—street repair, custodialservices, or solid waste collection, to name a few—may be lesssusceptible to these pathologies because of the reduced costs ofmonitoring and the reduced potential impact on health and welfare.

Third, the pathologies created by government or market failures arenot easily segregated; rather, they are often interdependent. As Weimerand Vining (1992) point out, certain government failures are simplyforms of market failure found in the public sector (informationasymmetry, organizational public goods, and organizationalexternalities). Privatization exacerbates this circumstance, and serves tofurther blur the lines between government and market pathologies.

Ultimately, privatization may or may not work; it depends on whatwe hope to gain from the arrangement. In many ways, the experience ofprison privatization in Mississippi may be deemed “successful,” in thesense that services are provided, and the accountability mechanisms inplace are reasonably effective. To make claims of “success” or “failure”requires an explicit ideological position as a benchmark. Instead ofmaking such claims, our purpose here is to decipher and analyze theclaims made by those in favor of, and those opposed to, privatization.This analysis suggests that privatization may not eliminate problems,but rather transfer them to another part of the arrangement. We thusmove beyond the more simplistic arguments “good” and “bad” and


begin to examine the arguments of both sides with an eye toward a moreconceptually sophisticated understanding of those arguments.

The implications of this research are both important and troubling.They are important in that they suggest a new approach and level ofanalysis for privatization studies, in that they direct our attention to theartificiality of the common justifications for privatization as a cure forgovernment failure. Likewise, they indicate the interdependence ofconcepts typically addressed separately by analysts. They are troubling inthat they appear to bring into question the presumed advantage of theprivate sector to provide or deliver those functions more efficiently thangovernment. Given that many governments are turning to privatizationas a means to meet growing public demands for services in an era ofdeclining resources, this research serves to direct our attention to claimsmade by both proponents and opponents of privatized arrangements.

The broader lesson for government is thus that privatization isnot easy, and that there may be unintended consequences that resultin outcomes opposite those intended. For those seeking to privatize agood or service, this analysis suggests that common arguments inprivatization debates are lacking, in that they fail to consider the natureof the relationships they create in the name of correcting problems inexisting relationships. For policy makers and policy analysts, the key isto consider carefully the failures the decision is meant to address, and toexamine whether the decision would create a new pathology as a result.Such foresight should, ultimately, lead to better policy decisions.

Notes

1 Much of the work presented in this article resulted from work conducted by the author under theauspices of a contract from the Mississippi Department of Corrections (MDOC), and the StennisInstitute of Government, Mississippi State University. The data presented in this article are used bypermission of the Stennis Institute, and any errors of fact or interpretation are the responsibility ofthe author. The author gratefully acknowledges the contributions of other members of the studyteam, three anonymous reviewers, and the editors of Politics and Policy.

2 See Savas (1987, chap. 6) and Weimer and Vining (1992, chap. 7) for discussions and evidenceacross a range of service areas. An additional, more recent line of inquiry examines privatizationthrough the lens of incomplete contracts (see Hart, Shleifer, and Vishny 1997, 1128), in which“residual rights of control in uncontracted for circumstances are important in determining agents’incentives.” This work tends to de-emphasize the role of competition in privatization decisions infavor of the incentives of the relevant actors.


3 Heilman and Johnson (1992) offer an excellent analysis of this approach, and its benefits, in theirstudy of the privatization of wastewater treatment.

4 There is a body of literature, exemplified by the work of Hart, Shleifer, and Vishny (1997),Heilman and Johnson (1992), and Kettl (1993), among others, that offers a more normativelyneutral stance to the privatization question. This work seeks to develop theoretical approaches thatcombine the arguments on each side of the debate. The extant literature, however, remains highlypolarized.

5 Using unadjusted dollar figures, the budget has increased from $48.3 million in FY 1986 to $292.6million in FY 2006, a 605-percent increase.

6 The figures for the population served include all categories of the MDOC population—incarcerated inmates, parolees, and those on probation. The figures given from FY 1986 are frominternal MDOC documents provided to the author from a previous research project. Thepopulation figures and budget figures for FY 2006 are taken from the MDOC web site (MississippiDepartment of Corrections 2007), and are the latest figures published as of this writing.

7 The first additional facility, the Central Mississippi Correctional Facility, opened in 1985.

8 One state official noted that the “NIMBY” problem had all but evaporated in Mississippi inrecent years. “Ten years ago the legislature had to suspend the veto power of the Rankin CountyBoard of Supervisors to ram the [Central Mississippi Correctional] Facility down their throats,” hesaid. “Today, they’re lined up around the block to get a prison in their county.”

9 Note that there is another potential level to the principal–agent problem, in that agencies may beconceived of as the implementation agents of the legislative branch. In this formulation there is yetanother level of separation between the citizens (as principal) and the private sector contractors (asagent).

10 The rationale for using Compliance Officers (COs) is that COs are all trained and sworn lawenforcement officials, and have experience enforcing state laws in private-sector settings.

11 Privately, several MDOC officials bemoaned the extra workload, but also made clear they feltbudget requests for additional administrative positions in MDOC would receive a chilly responsefrom the legislature.

12 It is important to note that both DiIulio (1986), and Schicor and Sechrest (1995) suggest there arelimitations to the usefulness of the ACA standards as an accountability mechanism, particularly inthe long term. However, most of the limitations they list become irrelevant as long as the state holdsthe contractor to the standards, and the Contract Monitor conducts regular inspections.

About the Author

John C. Morris is an associate professor in the Department of UrbanStudies and Public Administration at Old Dominion University. Heteaches courses in public policy, organization theory, and policyevaluation in the Master of Public Administration program and PhDin Public Administration and Urban Policy programs. His researchinterests included privatization, water policy, federalism, and


organization theory. He has published in journals such as PublicAdministration review, Policy Studies Journal, the Journal of Politics,Politics and Policy, and Environmental Policy.

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government and market pathologies of privatization: the case of prison privatization

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