Are Private Prisons Worth the Trouble?

With the American prison population exceeding capacity, the privatization of prisons has become an increasingly popular solution for many states. State governments often hire private contractors to build and to run prisons in an attempt to control the costs of managing their growing prison populations. The authors of a recently released study cite data showing that eight percent of prisoners in the United States are housed in privately-run facilities and that this number has grown in recent years.

In February, Richard J. Kish and Amy F. Lipton co-authored an examination of the use of private prison facilities in Economic Affairs titled “Do Private Prisons Really Offer Savings Compared with Their Public Counterparts?” They wanted to determine whether the true cost of private contracting of public services is lower than the cost of public provision after accounting for costs that are difficult to measure and including the monitoring of vendors and the assurance of quality standards. They find that the available data are insufficient to answer this question, though the data do suggest that privatization reduces costs. Although the studies that the authors review almost universally show a cost reduction, the available data are incomplete. Compounding the data problems, Kish and Lipton’s analysis reveals substantial difficulties in comparing prisons across jurisdictions or prisons with different security levels, different population sizes, or other relevant distinctions that will impact costs. In the end, the authors do not reach a result.

Kish and Lipton begin with the common argument in favor of privatization: it improves competition and reduces costs. They note that this may not account for certain intangible costs or the lessened impact of competition in industries dominated by a few providers. The authors examine these concerns in the context of some relevant economic theories. Kish and Lipton frame their argument in the context of privatization being beneficial when the savings in cost are larger than the transaction costs and costs of quality assurance, assuming that there is no corresponding drop in quality that outweighs the savings in cost.

The authors provide detail about the current nature of the US private prison industry and offer some explanations for the factors that brought the industry to its current state. They characterize the American private prison industry as an oligopoly controlled by two large corporations, Corrections Corporation of America and GEO Group, and note that similar oligopolies exist in the other nations that privatize prisons. Kish and Lipton also explain the compensation structure, which issues a flat payment to each prison occupied above 50 percent capacity, and only increases the payment upon reaching 90 percent capacity. This creates incentives for corporations to keep occupancy just above 50 percent or to crowd facilities to near-capacity, among other incentives that exist for prison corporations that may not align with the interests of justice.

After explaining that states with overcrowded prison systems turn to private contractors to build prisons more quickly and cheaply than state governments can, the authors list other areas in which private corporations reduce prison costs. They follow with examples of the hidden and intangible costs that may counter these cost savings. The authors present the results of previous studies of prison data, comparing public and private systems in various settings. These results include those of small studies comparing one prison against two others, a federal compilation of previous studies, and previous academic reviews of the results of previous studies. Nearly universally, these studies show significant savings achieved by privatizing prisons but also reveal gaps in the currently available data. Kish and Lipton present the results of each of the studies that they review and conclude that the currently available information does not present a clear enough picture of the actual differences in cost.

Given the advantages held by private corporations in the industry, their incentives to report savings, and the lower information standards imposed on them, it is expected that their outcome data look better than those of the more closely regulated and publicly-run prisons. Considering the hundreds of billions of dollars of public money annually put toward private contracting, it would certainly help to have a more complete picture of the actual costs and savings involved.

Feature Photo: cc/(jennofarc)