The Volokh Conspiracy - Privatization and the Law and Economics of Political Advocacy, Part 7:

This post continues my series on my upcoming Stanford Law Review paper on Privatization and the Law and Economics of Political Advocacy (see here for the technical paper). In the last post, I documented how there's a lot of hard evidence that public-sector corrections officers' unions advocate incarceration, and virtually no hard evidence that private firms do the same.

In this post, I consider what lessons we might draw from that. Then (below the fold), I elaborate on two curlicues of the theory (which you can skip if you're so inclined) -- first, why focus on public-sector unions and private firms only, and second, whether the public and private sectors really act strategically against each other.

* * *

As noted above, there is little hard evidence that private firms advocate stricter criminal law at all. Perhaps they do so secretly, in which case this simple model may be entirely unrealistic. Or perhaps this simple model is basically right, and the private firms are actually spending their money on a form of advocacy where the public good aspect isn't important—pro-privatization advocacy.

Pro-privatization advocacy is an area where, obviously, the private sector can't free-ride off the public sector, since the public sector is their enemy on that issue. If the private firms cooperate with each other, they reap all the benefits of their pro-privatization advocacy; and even if they don't cooperate with each other, an individual firm's pro-privatization contribution may benefit it directly to the extent that it (perhaps improperly) increases the likelihood that it will obtain a particular contract.

In real life, of course, money may be multi-purpose. I have treated "mute" campaign expenditures as though they were for some purpose—either privatization or incarceration—that was known to the donor but unknown to us. In fact, they could be for "access" to the candidate, which can be used at any time after the candidate prevails. But the model is general enough to accommodate this framework. At some point, donors will try to call in a favor. Favors cost something in terms of "political capital," and political capital is scarce: Calling in one favor makes it harder to call in another favor. At the point where donors have to determine what to ask for, we are back in the previous model.

The "access" framework has thus only postponed the applicability of the model until after the election. One would still predict, under this model, that the smaller donors would prefer to spend their capital supporting something with more of a private-good component, like privatization, and leave the pro-incarceration advocacy to the dominant actor. And this may in fact be what happens.

(click here to read the rest of the post)

* * *

Now, I'll elaborate on two curlicues of the theory. First, I'll explain why I have focused only on public-sector unions and private firms. (In short, private-sector workers aren't unionized, and public Departments of Corrections actually want fewer prisoners.)

Next, I'll explain why I have assumed that the private firms act as a bloc instead of competing with each other or, at the opposite extreme, cooperating with the public sector. (In short, cooperation within a fairly concentrated oligopoly isn't that difficult, because firms interact with each other a lot and have ample opportunity to punish each other for non-cooperative behavior. And private-sector firms interact with each other more than they do with the public sector, so enforcing cooperation across the whole prison industry would be more difficult. However, it turns out that how the industry cooperates, or whether it cooperates at all, doesn't make much of a difference for the main result.)

* * *

One might ask, at this point, why I have focused primarily on two apparently asymmetrical groups: the private-sector firms and the public-sector employees. What about the employees of those firms, or the employers of those public guards?

In principle, it's unclear a priori who would want to lobby; a case-by-case analysis of the incentives of the various parties is necessary. In this case, my choice of actors was inspired by the state of the evidence and the debate: Public corrections officers' unions, especially in California, are known to engage in pro-incarceration advocacy; and private prison firms are alleged to do so. But let us think about this theoretically anyway.

First, the workers. No single worker has enough of a stake in the system to benefit from spending resources on advocacy to help his industry. We should only expect workers to be a significant political force if they can enforce some sort of collective action by punishing their own free-riders. The easiest way for them to do this is to require membership in or contribution to a union, which then lobbies out of members' dues. Private corrections officers aren't unionized in most states, and this is a sufficient explanation for why they haven't been observed lobbying.

As I explain above, I assume that unions represent their members and seek to maximize total union rents—the difference between union and non-union wages, times the size of the public sector. The prediction that such unions would seek to increase the size of their sector is straightforward: A larger sector may mean a more powerful union and therefore potentially higher wages, benefits, or job security down the road (and perhaps—to introduce agency costs for a moment—perks for union officials). It's possible that unions may sometimes oppose expansion of their industry—for instance, if increases in prisoners made corrections officers worse off because they weren't accompanied by compensating wage or staff increases. This may occur in some industries, but apparently not in the prison industry. The public corrections officers' unions seem, so far, to have been strong enough to make sure that an increased flow of prisoners has not made them worse off (even if budgets have been tight elsewhere).

Now, let's consider the employers. Some private prison firms also run alternatives to incarceration, so it isn't obvious that they would advocate an increased emphasis on imprisonment. Still, they may benefit from the other elements I have included in the term "incarceration": increased illegalization, increased law enforcement, and longer sentences (once the imprisonment decision has already been made). Though increased incarceration may also increase private firms' costs, private firms have a built-in protection against too much deterioration in their position: They don't have to bid on a contract unless they anticipate making enough profit. So it isn't implausible that private firms would benefit from incarceration; though of course their willingness to spend money to increase incarceration depends on how profitable they are.

What about the public employers, the Departments of Corrections? They are not players in the pro-incarceration advocacy game for a simple reason: Generally, they favor alternatives to incarceration.

The Alabama DOC commissioner has advocated sentencing reform, community correction programs, and other measures to "reverse the prison population growth trend." The head of the Illinois DOC advocates reentry programs that would lower the prison population by countering "the awful, vicious cycle" by which recidivist parolees are re-incarcerated "before the ink is dry on their parole papers." The Michigan DOC director concerns herself with measures to reduce the prison population and thus delay the day the state runs out of funded capacity for prison beds. The Montana DOC director candidly tells crowds that "[p]rison isn't working," and his department considers measures to reduce the prison population and increase community corrections. The New Mexico Corrections Department is focusing on using early parole to control its prison population. The North Carolina DOC advocates redirecting non-trafficking drug users from prison to "intermediate programs." Ohio corrections officials complain about the high costs of mandatory minimum sentences. The Pennsylvania DOC is implementing programs "aimed at diverting less serious offenders from prison" to "free-up prison space needed for more serious offenders." The Washington DOC secretary "is a big believer in work-release programs." And the Wisconsin DOC secretary advocates focusing on "prevention and treatment in addition to effective law enforcement."

This makes some sense: While it is commonly thought that agencies want to aggrandize themselves, that intuition is only a special case of a more general belief that agency officials act in their own self-interest and that their self-interest tends to be aligned with the size and power of their agencies. And increasing prisoners without corresponding budget increases to match the increasing cost of incarceration (a cost that of course includes corrections officers' salaries, as well as health care and other factors) can easily make prison officials worse off. Thus, the interests of Departments of Corrections may not be aligned with those of corrections officers and their unions. Moreover, DOCs run both prisons and many alternative programs, so even if more inmates means more power for the DOC, it makes sense that the DOC would want to handle those inmates in cheaper ways than incarceration. Thus, it is not surprising to find prison systems arguing for alternatives to incarceration in a time of tight budgets.

* * *

All this talk of how the 10% firm acts and the profits of "the industry" assumes that the private sector, in deciding how much to spend, acts as a bloc: The private firms all cooperate with each other, but don't cooperate with the public sector. This is possible, but it's not the only possible story. I could have made either of two other, more extreme assumptions. First, there could be no cooperation at all—all the firms could be acting independently. Second, there could be total cooperation—all the firms could be cooperating with each other and with the public sector. This section explores the implications of these alternative assumptions and tentatively defends my decision to adopt the intermediate assumption of cooperation within the private sector but not with the public sector. But in the end, the different assumptions don't significantly alter the bottom line.

If all firms act independently, the relevant shares are even less than indicated above. In 1999, CCA had a bit over half the market, Wackenhut (now the GEO Group) had about a quarter, Management & Training Corp. had about 5--8%, Cornell Corrections Inc. and Correctional Services Corp. each had about 5--6%, CiviGenics, Inc. had about 2--3%, and a handful of other firms had under 1%.

So, while the average private-sector share in State X may be 10%, that number is irrelevant if all firms act independently. The relevant shares may be, for instance, 6% for CCA, 2% for the GEO Group, 1% for Management & Training Corp., and 1% for Cornell Corrections . . . and 90% for the public sector. The assumption of independent firms would make it even more likely that the public sector is the dominant sector.

Now consider the opposite assumption—that everyone cooperates. A single prison industry bloc would choose an optimal total amount to maximize total industry benefit. Because the actors are still formally separate, they would also choose some way to allocate the contributions among themselves.

If the private industry had the same benefit per prison as the public sector, then total cooperation would be indistinguishable from monopoly: Because total industry benefit would be the same before and after privatization, the strategy that chooses contribution amounts to maximize that benefit would likewise be the same.

However, as I argue above, private firms aren't terribly profitable, while public-sector unions have significant public-sector wage premiums to protect. By replacing part of the public sector with a relatively unprofitable private sector, privatization actually decreases the industry's total benefit. Therefore, even under total cooperation, there is less to maximize; expenditures on pro-incarceration advocacy are thus less productive (just as if there were a tax rate on industry revenues); and so expenditures on advocacy still go down under privatization.

How can we tell which form of cooperation is most likely? Not being able to find explicit cooperation doesn't mean anything: The cooperation may just be tacit. Observing the private industry's trade association, APCTO, also doesn't answer the question: While trade groups may provide a forum for discussing common lobbying strategies, but talk is cheap and many trade groups are ineffective; in particular, APCTO doesn't seem to fulfill much of a coordinating function, as firms do their own lobbying and most of their own advocacy.

Even observing some actual lobbying by the major firms doesn't answer the question: As I noted above, they may all be lobbying for privatization, which has a strong private-good component, since a firm's contributions may increase the probability that it gets a project in the future.

On theoretical grounds, it seems at least plausible that the private firms would cooperate among themselves. They're repeat players in a long-term process, which includes both political advocacy and their concern of bidding on prison projects; so there is ample opportunity for private firms to enforce a regime of cooperative behavior. If firms free-ride off each other in their advocacy expenditures, their fellows could punish them in the future in any number of ways—for instance, by never cooperating on campaign spending anymore, by bidding aggressively in prison auctions, or by bidding aggressively only in certain markets.

By contrast, public corrections officers' unions may have fewer ways of punishing private firms. They don't bid against each other in the underlying auctions, so they can't threaten to end any cooperative behavior there. They're bitter political adversaries in the privatization advocacy world, so again there seems to be no preexisting cooperation that can be terminated. They can threaten to not cooperate any more in pro-incarceration advocacy or to step up their anti-privatization advocacy, but this may not be as effective a threat.

For these reasons, I believe that cooperation among private prison firms is more likely than either, on the one hand, totally non-cooperative behavior or, on the other hand, totally cooperative behavior between the public and private sectors. However, because the ultimate results under any of the assumptions don't differ that much, which assumption we choose isn't terribly important.

(hide)

All Related Posts (on one page) | Some Related Posts:

My paper on The Conglomerate:
Privatization and the Law and Economics of Political Advocacy, Part 9 -- Conclusion:
Privatization and the Law and Economics of Political Advocacy, Part 8:
Privatization and the Law and Economics of Political Advocacy, Part 7:
Privatization and the Law and Economics of Political Advocacy, Part 6:...
Privatization and the Law and Economics of Political Advocacy, Part 2:
Privatization and the Law and Economics of Political Advocacy:
Volume-mates with Orin:

	[Sasha Volokh, April 11, 2007 at 10:53am] Trackbacks Privatization and the Law and Economics of Political Advocacy, Part 7: This post continues my series on my upcoming Stanford Law Review paper on Privatization and the Law and Economics of Political Advocacy (see here for the technical paper). In the last post, I documented how there's a lot of hard evidence that public-sector corrections officers' unions advocate incarceration, and virtually no hard evidence that private firms do the same. In this post, I consider what lessons we might draw from that. Then (below the fold), I elaborate on two curlicues of the theory (which you can skip if you're so inclined) -- first, why focus on public-sector unions and private firms only, and second, whether the public and private sectors really act strategically against each other. * * * As noted above, there is little hard evidence that private firms advocate stricter criminal law at all. Perhaps they do so secretly, in which case this simple model may be entirely unrealistic. Or perhaps this simple model is basically right, and the private firms are actually spending their money on a form of advocacy where the public good aspect isn't important—pro-privatization advocacy. Pro-privatization advocacy is an area where, obviously, the private sector can't free-ride off the public sector, since the public sector is their enemy on that issue. If the private firms cooperate with each other, they reap all the benefits of their pro-privatization advocacy; and even if they don't cooperate with each other, an individual firm's pro-privatization contribution may benefit it directly to the extent that it (perhaps improperly) increases the likelihood that it will obtain a particular contract. In real life, of course, money may be multi-purpose. I have treated "mute" campaign expenditures as though they were for some purpose—either privatization or incarceration—that was known to the donor but unknown to us. In fact, they could be for "access" to the candidate, which can be used at any time after the candidate prevails. But the model is general enough to accommodate this framework. At some point, donors will try to call in a favor. Favors cost something in terms of "political capital," and political capital is scarce: Calling in one favor makes it harder to call in another favor. At the point where donors have to determine what to ask for, we are back in the previous model. The "access" framework has thus only postponed the applicability of the model until after the election. One would still predict, under this model, that the smaller donors would prefer to spend their capital supporting something with more of a private-good component, like privatization, and leave the pro-incarceration advocacy to the dominant actor. And this may in fact be what happens. (click here to read the rest of the post) * * * Now, I'll elaborate on two curlicues of the theory. First, I'll explain why I have focused only on public-sector unions and private firms. (In short, private-sector workers aren't unionized, and public Departments of Corrections actually want fewer prisoners.) Next, I'll explain why I have assumed that the private firms act as a bloc instead of competing with each other or, at the opposite extreme, cooperating with the public sector. (In short, cooperation within a fairly concentrated oligopoly isn't that difficult, because firms interact with each other a lot and have ample opportunity to punish each other for non-cooperative behavior. And private-sector firms interact with each other more than they do with the public sector, so enforcing cooperation across the whole prison industry would be more difficult. However, it turns out that how the industry cooperates, or whether it cooperates at all, doesn't make much of a difference for the main result.) * * * One might ask, at this point, why I have focused primarily on two apparently asymmetrical groups: the private-sector firms and the public-sector employees. What about the employees of those firms, or the employers of those public guards? In principle, it's unclear a priori who would want to lobby; a case-by-case analysis of the incentives of the various parties is necessary. In this case, my choice of actors was inspired by the state of the evidence and the debate: Public corrections officers' unions, especially in California, are known to engage in pro-incarceration advocacy; and private prison firms are alleged to do so. But let us think about this theoretically anyway. First, the workers. No single worker has enough of a stake in the system to benefit from spending resources on advocacy to help his industry. We should only expect workers to be a significant political force if they can enforce some sort of collective action by punishing their own free-riders. The easiest way for them to do this is to require membership in or contribution to a union, which then lobbies out of members' dues. Private corrections officers aren't unionized in most states, and this is a sufficient explanation for why they haven't been observed lobbying. As I explain above, I assume that unions represent their members and seek to maximize total union rents—the difference between union and non-union wages, times the size of the public sector. The prediction that such unions would seek to increase the size of their sector is straightforward: A larger sector may mean a more powerful union and therefore potentially higher wages, benefits, or job security down the road (and perhaps—to introduce agency costs for a moment—perks for union officials). It's possible that unions may sometimes oppose expansion of their industry—for instance, if increases in prisoners made corrections officers worse off because they weren't accompanied by compensating wage or staff increases. This may occur in some industries, but apparently not in the prison industry. The public corrections officers' unions seem, so far, to have been strong enough to make sure that an increased flow of prisoners has not made them worse off (even if budgets have been tight elsewhere). Now, let's consider the employers. Some private prison firms also run alternatives to incarceration, so it isn't obvious that they would advocate an increased emphasis on imprisonment. Still, they may benefit from the other elements I have included in the term "incarceration": increased illegalization, increased law enforcement, and longer sentences (once the imprisonment decision has already been made). Though increased incarceration may also increase private firms' costs, private firms have a built-in protection against too much deterioration in their position: They don't have to bid on a contract unless they anticipate making enough profit. So it isn't implausible that private firms would benefit from incarceration; though of course their willingness to spend money to increase incarceration depends on how profitable they are. What about the public employers, the Departments of Corrections? They are not players in the pro-incarceration advocacy game for a simple reason: Generally, they favor alternatives to incarceration. The Alabama DOC commissioner has advocated sentencing reform, community correction programs, and other measures to "reverse the prison population growth trend." The head of the Illinois DOC advocates reentry programs that would lower the prison population by countering "the awful, vicious cycle" by which recidivist parolees are re-incarcerated "before the ink is dry on their parole papers." The Michigan DOC director concerns herself with measures to reduce the prison population and thus delay the day the state runs out of funded capacity for prison beds. The Montana DOC director candidly tells crowds that "[p]rison isn't working," and his department considers measures to reduce the prison population and increase community corrections. The New Mexico Corrections Department is focusing on using early parole to control its prison population. The North Carolina DOC advocates redirecting non-trafficking drug users from prison to "intermediate programs." Ohio corrections officials complain about the high costs of mandatory minimum sentences. The Pennsylvania DOC is implementing programs "aimed at diverting less serious offenders from prison" to "free-up prison space needed for more serious offenders." The Washington DOC secretary "is a big believer in work-release programs." And the Wisconsin DOC secretary advocates focusing on "prevention and treatment in addition to effective law enforcement." This makes some sense: While it is commonly thought that agencies want to aggrandize themselves, that intuition is only a special case of a more general belief that agency officials act in their own self-interest and that their self-interest tends to be aligned with the size and power of their agencies. And increasing prisoners without corresponding budget increases to match the increasing cost of incarceration (a cost that of course includes corrections officers' salaries, as well as health care and other factors) can easily make prison officials worse off. Thus, the interests of Departments of Corrections may not be aligned with those of corrections officers and their unions. Moreover, DOCs run both prisons and many alternative programs, so even if more inmates means more power for the DOC, it makes sense that the DOC would want to handle those inmates in cheaper ways than incarceration. Thus, it is not surprising to find prison systems arguing for alternatives to incarceration in a time of tight budgets. * * * All this talk of how the 10% firm acts and the profits of "the industry" assumes that the private sector, in deciding how much to spend, acts as a bloc: The private firms all cooperate with each other, but don't cooperate with the public sector. This is possible, but it's not the only possible story. I could have made either of two other, more extreme assumptions. First, there could be no cooperation at all—all the firms could be acting independently. Second, there could be total cooperation—all the firms could be cooperating with each other and with the public sector. This section explores the implications of these alternative assumptions and tentatively defends my decision to adopt the intermediate assumption of cooperation within the private sector but not with the public sector. But in the end, the different assumptions don't significantly alter the bottom line. If all firms act independently, the relevant shares are even less than indicated above. In 1999, CCA had a bit over half the market, Wackenhut (now the GEO Group) had about a quarter, Management & Training Corp. had about 5--8%, Cornell Corrections Inc. and Correctional Services Corp. each had about 5--6%, CiviGenics, Inc. had about 2--3%, and a handful of other firms had under 1%. So, while the average private-sector share in State X may be 10%, that number is irrelevant if all firms act independently. The relevant shares may be, for instance, 6% for CCA, 2% for the GEO Group, 1% for Management & Training Corp., and 1% for Cornell Corrections . . . and 90% for the public sector. The assumption of independent firms would make it even more likely that the public sector is the dominant sector. Now consider the opposite assumption—that everyone cooperates. A single prison industry bloc would choose an optimal total amount to maximize total industry benefit. Because the actors are still formally separate, they would also choose some way to allocate the contributions among themselves. If the private industry had the same benefit per prison as the public sector, then total cooperation would be indistinguishable from monopoly: Because total industry benefit would be the same before and after privatization, the strategy that chooses contribution amounts to maximize that benefit would likewise be the same. However, as I argue above, private firms aren't terribly profitable, while public-sector unions have significant public-sector wage premiums to protect. By replacing part of the public sector with a relatively unprofitable private sector, privatization actually decreases the industry's total benefit. Therefore, even under total cooperation, there is less to maximize; expenditures on pro-incarceration advocacy are thus less productive (just as if there were a tax rate on industry revenues); and so expenditures on advocacy still go down under privatization. How can we tell which form of cooperation is most likely? Not being able to find explicit cooperation doesn't mean anything: The cooperation may just be tacit. Observing the private industry's trade association, APCTO, also doesn't answer the question: While trade groups may provide a forum for discussing common lobbying strategies, but talk is cheap and many trade groups are ineffective; in particular, APCTO doesn't seem to fulfill much of a coordinating function, as firms do their own lobbying and most of their own advocacy. Even observing some actual lobbying by the major firms doesn't answer the question: As I noted above, they may all be lobbying for privatization, which has a strong private-good component, since a firm's contributions may increase the probability that it gets a project in the future. On theoretical grounds, it seems at least plausible that the private firms would cooperate among themselves. They're repeat players in a long-term process, which includes both political advocacy and their concern of bidding on prison projects; so there is ample opportunity for private firms to enforce a regime of cooperative behavior. If firms free-ride off each other in their advocacy expenditures, their fellows could punish them in the future in any number of ways—for instance, by never cooperating on campaign spending anymore, by bidding aggressively in prison auctions, or by bidding aggressively only in certain markets. By contrast, public corrections officers' unions may have fewer ways of punishing private firms. They don't bid against each other in the underlying auctions, so they can't threaten to end any cooperative behavior there. They're bitter political adversaries in the privatization advocacy world, so again there seems to be no preexisting cooperation that can be terminated. They can threaten to not cooperate any more in pro-incarceration advocacy or to step up their anti-privatization advocacy, but this may not be as effective a threat. For these reasons, I believe that cooperation among private prison firms is more likely than either, on the one hand, totally non-cooperative behavior or, on the other hand, totally cooperative behavior between the public and private sectors. However, because the ultimate results under any of the assumptions don't differ that much, which assumption we choose isn't terribly important. (hide) All Related Posts (on one page) \| Some Related Posts: My paper on The Conglomerate: Privatization and the Law and Economics of Political Advocacy, Part 9 -- Conclusion: Privatization and the Law and Economics of Political Advocacy, Part 8: Privatization and the Law and Economics of Political Advocacy, Part 7: Privatization and the Law and Economics of Political Advocacy, Part 6:... Privatization and the Law and Economics of Political Advocacy, Part 2: Privatization and the Law and Economics of Political Advocacy: Volume-mates with Orin: