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Privatization and the Law and Economics of Political Advocacy, Part 2:

In my previous post, I introduced my forthcoming Stanford Law Review article, Privatization and the Law and Economics of Political Advocacy. (Again, for those who are interested in a more technical exposition, you can also check out my related economics paper.) I explained the nature of the political-influence argument against privatization, and quoted from recent writers who have applied this critique to prison privatization. This post gives a brief outline of my argument, which I will develop further in later posts.

* * *

I assume, for purposes of this Article, that the concern underlying this critique is reasonable—that is, that economically self-interested pro-incarceration advocacy is undesirable. (Though in fact, this is not at all clear; I'll return to this point later.) This concern, however, fails to support the argument against privatization for several reasons.

First, the public sector—chiefly public corrections officers' unions—is already a major self-interested pro-incarceration political force. For instance, the most active corrections officers' union, the California Correctional Peace Officers Association, has contributed massively in support of tough-on-crime positions on voter initiatives and has given money to crime victims' groups, and public corrections officers' unions in other states have endorsed candidates for their tough-on-crime positions. Private firms would thus enter, and partly displace some of the actors in, a heavily populated field.

Second, there is little reason to believe that increasing privatization would increase the amount of self-interested pro-incarceration advocacy. In fact, it is even possible that increasing privatization would reduce such advocacy. The intuition for this perhaps surprising result comes from the economic theory of public goods and collective action.

The political benefits that flow from prison providers' pro-incarceration advocacy are what economists call a "public good," because any prison provider's advocacy, to the extent it is effective, helps every other prison provider. (We call it a public good even if it is bad for the public: The relevant "public" here is the universe of prison providers.) When individual actors capture less of the benefit of their expenditures on a public good, they spend less on that good; and the "smaller" actors, who benefit the least from the public good, free-ride off the expenditures of the "largest" actor.

In today's world, the largest actor—that is, the actor that profits the most from the system—tends to be the public-sector union, which still provides the lion's share of prison services and whose members benefit from wages significantly higher than those of their private-sector counterparts; the smaller actor is the private prison industry, which not only has a small proportion of the industry but also does not make particularly high profits.

By breaking up the government's monopoly of prison provision and awarding part of the industry to private firms, therefore, privatization can reduce the industry's advocacy by introducing a collective action problem. The public-sector unions will spend less because under privatization they experience less of the benefit of their advocacy, while the private firms will tend to free-ride off the public sector's advocacy. This collective action problem is fortunate for the critics of pro-incarceration advocacy—a happy, usually unintended side effect of privatization. One might even say that prison providers under privatization are led by an invisible hand to promote an end which was no part of their intention.

Commenterlein (mail):
Your argument seems to make the flawed assumption that the objective functions of private prison providers and of the correction officers' union are the same or at least similar.

If instead you assumed that private prison providers are likely to be (close to) profit maximizing while unions are more likely to maximize the wages and benefits of their members you would arrive at very different conclusions: The incentives of private prison providers to maximize the size of their market is likely to be much stronger than the incentives of a union to maximize the number of their members. In fact I would argue that revealed union preferences indicate clearly that unions put more weight on increasing the benefits of their members than maximizing the number of employees in their industry.
4.4.2007 11:24am
J. F. Thomas (mail):
So you appear to be arguing that one of the advantages of privatization of prisons is that private companies will be able to bust unions and that the evil power of the guards' unions lobby to call for tough on crime provisions won't be replaced by equally strong calls from the private companies owners for the very same provisions.

This seems counterintuitive on several points. First of all, it seems that guards unions would be more interested in lobbying for efforts that make their lives easier while protecting their members jobs (e.g. shorter shifts, lower guard to inmate ratios), not necessarily keeping simply increasing the number of inmates, which could actually make their jobs harder. Secondly, you seem to assume that private companies will resist unionization. What if they don't? Your whole argument (which is on pretty shaky ground anyway, since it makes absolutely no sense that private companies aren't going to do everything in their power to generate more business) then goes out the window.

Plus, since the new guards are no longer public employees, it is going to be much harder to prevent them from striking.
4.4.2007 11:31am
Commenterlein (mail):
One more comment: The private prison providers' collective action problem you describe can be quite easily overcome through an industry assocation, which is indeed what pretty much any significant industry in this country is doing. Collect association dues in proportion to each members' revenue and let the association hire the lobbyists - collective action problem solved.
4.4.2007 11:38am
Sasha Volokh (mail) (www):
Commenterlein: All this will be revealed in due course. But to anticipate -- I don't assume that public and private prisons have the same objective functions. On the contrary: I assume that private firms are profit maximizers, while unions are "rent"-maximizers, where rent is defined as (Wg-Wm)*Lg, where Wg is the public-sector wage, Wm is the market wage (so Wg-Wm is the "union rent"), and Lg is the size of the public sector.

You think that unions just care about Wg-Wm, and you think that I think that unions just care about Lg, but in fact I think they care about both together. The union-rent maximization hypothesis is quite common in the labor economics literature, so this isn't something I just made up, and it can be derived from microfoundations.

On your second point: I agree with you that the private sector can overcome its collective action problem. In fact, that's one of my assumptions! So I only disagree with you to the extent that you think we disagree! In any case, the collective action problem is not within the private sector, but between the private and public sectors, since the public sector has 100% of the industry before privatization and only, say, 90% after. Collective action problem not solved!
4.4.2007 11:52am
J. F. Thomas (mail):
I assume that private firms are profit maximizers, while unions are "rent"-maximizers, where rent is defined as (Wg-Wm)*Lg, where Wg is the public-sector wage, Wm is the market wage (so Wg-Wm is the "union rent")

But if the market wage is close to a union wage, because unionization efforts in the private sector are successful, then Lg doesn't matter. Also unions care about other things besides wages, like working conditions and protecting members jobs, things that are not necessarily improved, and may actually be harmed, simply by increasing the supply of inmates or lengthening sentences.
4.4.2007 12:06pm
J. F. Thomas (mail):
In any case, the collective action problem is not within the private sector, but between the private and public sectors, since the public sector has 100% of the industry before privatization and only, say, 90% after. Collective action problem not solved!

But since the private prison trade group and the guards union would be working toward the same goal (increase the size of the "market") why wouldn't they work together on tough-on-crime provisions, actually increasing the legislative impact, since they would be able to influence both the pro-business and pro-labor sides of the aisle?
4.4.2007 12:11pm
Sasha Volokh (mail) (www):
J.F. Thomas: It's like Mancur Olson says: "the customary view that groups of individuals with common interests tend to further those common interests appears to have little if any merit." Just because two people have the same goals doesn't mean they'll cooperate: In fact, having the same goals is a prerequisite for free-riding! For instance, firms all prefer a high price for their product, and sometimes they can coordinate to make the price high. But at other times, they undercut each other, and we get the benefits of competition. And this would be true even if there were no antitrust law.

Whether firms can work together to achieve a common goal depends on how easy it is for them to enforce coordinated behavior, for instance by punishing each other in various ways for non-cooperative behavior. This is what game theory (in a dynamic setting) is all about (folk theorem, tit for tat, etc.). The more they interact with each other, the more possibilities there are for such coordination.

This is why I think collusion within the private sector is more likely than collusion between the private and public sectors -- and even within the private sector, companies seem to compete against each other, and the trade association doesn't seem to be particularly effective.

Finally, on your previous comment: Sure, private industries are sometimes unionized. But (1) unionization is more difficult in a competitive setting, whether there's greater downward pressure on price, and (2) in the U.S., unionization is much easier in the public sector, as the high public unionization and low private unionization rates show in the U.S. -- this is a combination of a couple of factors, including (a) labor law, (b) private companies fighting unionization and wage demands more because they have a harder budget constraint, and (c) governments fighting unionization and wage demands less because they're in part fulfilling social goals through public employment.

So there are excellent reasons to expect that unionization will be less, perhaps far less, in a privatized industry. And there are similarly good reasons to expect that wages will be lower in a privatized industry. Both of these are certainly the case today. (Using today's numbers, Wg-Wm is large -- about 30-65% of Wm.)
4.4.2007 12:36pm
Commenterlein (mail):
Sasha,

Thank you for your thoughtful reply, much appreciated. I am looking forward to hearing more about the paper.

Are you still cooking these excellent soups of yours?

C.
4.4.2007 2:42pm
Sasha Volokh (mail) (www):
Indeed. Have you had my soups?
4.4.2007 3:00pm
Commenterlein (mail):
Only a few times.

Isn't the internet wonderful :-).

C. (not really)
4.4.2007 3:17pm
John McCall (mail):
I assume, for purposes of this Article, that the concern underlying this critique is reasonable—that is, that economically self-interested pro-incarceration advocacy is undesirable. (Though in fact, this is not at all clear; I'll return to this point later.)

Nitpick.
4.4.2007 3:48pm
Non-Prisoner (mail):
I think your paper is interesting, but the invocation of Olson seems a little misleading. The uneven distribution of transaction costs and payoffs for collective action does not mean that organization is hard. It means that it is much harder for some than others. Alliances of convenience seem to be prevalent where there is little cost to forming them and I would suggest that this is true regardless of the horizon of future interactions. Perhaps we disagree. At least recently, alliances between industry and unions are not uncommon.

You might consider in the future issues such as exporting prisoners to other states (e.g., AK and HI prisoners in AZ), which might have an interesting effect on prisons as political pork and the nature of state lobbying. In addition, if the profits from private prisons come at the expense of wages and prison conditions, it certainly would be interesting if, notwithstanding the current insanity of California's public system, differential prison conditions or the regulation of them ended up being an obstacle to cooperation.
4.4.2007 4:04pm
Colin (mail):
Indeed. Have you had my soups?

Only a few times.


Careful! They traced the comment - it's coming from inside the house.
4.4.2007 4:06pm
J. F. Thomas (mail):
as the high public unionization and low private unionization rates show in the U.S. -- this is a combination of a couple of factors, including (a) labor law, (b) private companies fighting unionization and wage demands more because they have a harder budget constraint, and (c) governments fighting unionization and wage demands less because they're in part fulfilling social goals through public employment.

I don't want to turn this into a thread about unions, but you are way oversimplifying the reasons for the decline of private sector unionization in this country. First of all, I think b) is a completely bogus reason for the rise of public sector unions, and in some sectors (e.g., the federal government) such unions can't even negotiate wages. The public sector has just as many, if not more, albeit different, budget constraints as private industry. Additionally, there are a myriad of other reason for the decline of private sector unions, some of which are applicable in this case (e.g., the ease with which companies are able to suppress organization efforts in the workplace currently), some of which are completely inapplicable (the movement of traditionally unionized industries to "right-to-work" states or even out of the country). Regardless, many of these factors could change quickly with a few NLRB appointments by a Democratic president or strengthening of labor laws by congress.
4.4.2007 5:14pm
Sasha Volokh (mail) (www):
Well, I'll just say right away that, if labor law were to change in such a way that you could expect comparable wages in public and private sector prisons, my paper would be very different. My model would still say that privatization could make pro-incarceration lobbying go down at current levels of privatization, but the level of privatization where that stops being true would be lower.

But I'm taking the labor landscape as given here, and incorporating by reference the many cogent things that labor economists have written about public-sector vs. private-sector unions. Under current conditions, not only do we see lower unionization and lower wages in the private sector, but there's also good reason to expect that to continue.
4.4.2007 5:42pm
liberty (mail) (www):
Incidentally, what is your prediction regarding complete privatization? If there are no public sector unions, what might the collective action situation look like then?
4.4.2007 5:50pm
Sasha Volokh (mail) (www):
It depends whether the total benefit of the private sector is smaller or larger.

So if you have a totally competitive industry making zero economic profits, they have no interest in expanding the industry (unless they can also make the industry non-competitive); if you have a monopoly provider or colluding providers, or even if you have an oligopolistic industry making oligopolistic profits, then they do have some interest in expanding the industry. But to determine whether this is greater or less than in the public-provision case, I'd have to check out the numbers.

If there's a private-sector union making union rents, then they may collude with the private firms, like the unions and firms do in various industries when they collaborate on pro-industry policy advocacy (like when the AFL-CIO joined the American Trucking Associations and other parties in the Whitman v. Am. Trucking Assn's litigation, etc.). Again, I'd have to check out the numbers; it depends how powerful the union is, because that determines how much of a wage premium they get.

The super-simple result that I present in the paper would be as follows: If the private sector has exactly the same benefits from provision as the public sector, then the "optimal" (i.e., advocacy-minimizing) split of the industry would be 50-50 -- because the level of advocacy is determined by the "largest" actor, so minimizing advocacy means minimizing the largest actor.
4.4.2007 6:04pm