The Effect of Privatization on the Public and Private Prison Lobbies

A few months ago, Praeger put out a three-volume set called Prison Privatization: The Many Facets of a Controversial Industry. Volume 3 is about “The Political Climate of Prison Privatization”, and chapter 1 of that volume is The Effect of Privatization on the Public and Private Prison Lobbies. I’m going to be serial-blogging that chapter here in the coming days. For those of you who are interested in a fuller version, check out my Stanford Law Review piece from 2008, Privatization and the Law and Economics of Political Advocacy.

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Private prison firms are often accused of lobbying for incarceration because, like a hotel, they have “a strong economic incentive to book every available room and encourage every guest to stay as long as possible” (Schlosser 1998; see also Dolovich 2005; Shichor 1995; Sarabi and Bender 2000). This accusation has little support, either theoretical or empirical. At worst, the political influence argument is backward: privatization will in fact decrease prison providers’ pro-incarceration influence. At best, the argument is dubious: its accuracy depends on facts that proponents of the argument haven’t developed.

First, self-interested pro-incarceration advocacy is already common in the public sector—chiefly from public-sector corrections officers’ unions. 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 similar unions in other states have endorsed candidates for their tough on crime positions. Private firms would thus enter a heavily populated field and partly displace some of the existing actors.

Second, there’s little reason to believe that increasing privatization would increase the amount of self-interested pro-incarceration advocacy. In fact, it’s 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 a “public good,” because any prison provider’s advocacy, to the extent that it’s effective, helps every other prison provider. 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 less from the public good, free ride off the expenditures of the “largest” actor.

Today, the largest actor—the actor that profits the most from the system—tends to be the public-sector union, because the public sector provides the lion’s share of prison services, and public-sector corrections officers 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 smaller proportion of the industry but also doesn’t 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.

This is the simplest form of the story, but one can also tell more complicated versions in which privatization doesn’t necessarily decrease total industry-expanding political advocacy. After presenting my main model, I introduce some realistic complications. Some of them don’t change the basic result of the model; others make the effect of privatization ambiguous—increasing private-sector advocacy but also decreasing public-sector advocacy. Either way, we don’t unambiguously predict that privatization increases advocacy. There is thus no reason to believe an argument against prison privatization based on the possibility of self-interested pro-incarceration advocacy—unless the argument takes a position on how lobbying, political contributions, and advocacy work, and why any increase in private-sector advocacy would outweigh the decrease in public-sector advocacy. Either this argument against prison privatization is clearly false, or it’s only true under certain conditions that the critics of privatization haven’t shown exist.

Advocacy as a Public Good

When a good is private, everyone pays for, and enjoys, only his or her own consumption. By contrast, industry-increasing advocacy is a public good; everyone benefits from the total amount (Oakland 1987). Privatizing part of the industry therefore introduces a collective action problem: unless everyone in the industry cooperates with each other, they will in aggregate spend less on industry-increasing advocacy than a single firm would if it covered the whole industry, because a portion of their expenditures will benefit their competitors.

The Basic Model

A monopolist is willing to lobby to increase the size of its industry. To determine how much to spend, it weighs the benefit its money can buy against the cost of the lobbying. It’s reasonable to think that spending money on advocacy is subject to decreasing marginal returns, so each additional dollar gives less and less benefit. The cost of a dollar’s worth of advocacy, on the other hand, is always $1. As long as the benefit of an advocacy dollar is greater than $1, the monopolist continues to spend until that benefit falls to $1. Say the resulting amount of spending is $1 million.

Now suppose we split up the industry so the large firm has 90 percent of the market and a competitor has the other 10 percent. The previous optimal amount of spending, $1 million, is no longer optimal for the larger firm: the cost of that last dollar was $1, and although the benefit of the dollar is $1 for the whole industry, the 90 percent firm only sees 90 cents of that benefit. The split-up has the same effect on the large firm as a 10 percent tax. Thus, the large firm spends less. As it cuts back, the benefit of the last dollar spent rises; it stops cutting back as soon as the total benefit to the industry of the last dollar spent reaches about $1.11 (which is a $1 benefit to the large firm). Say the new amount is $900,000. The competitor, which has 10 percent of the industry, does a similar calculation to find the point where the marginal expected benefit to the whole industry is $10, which gives the firm $1. Say this point is at $300,000.

The story so far is incomplete. The large firm doesn’t want the amount spent to be exactly $900,000; it would be thrilled if other people happened to contribute more. It’s just that it isn’t personally willing to put another dollar into the pot if the pot already contains $900,000: if the benefit of a dollar only depends on the total amount spent, and if the 900,000th dollar had a total benefit worth $1.11 (and thus a benefit to the large firm worth $1), then the 900,001st dollar has a benefit worth slightly less than $1.11. The 10 percent competitor, by a similar reasoning, wants the total amount spent to be at least $300,000 and will not put a 300,001st dollar into the pot.

This leads to two conclusions. First, the total amount spent will be equal to the larger firm’s threshold—in this case, $900,000. If it were less, the larger firm would want to spend more money. And if it were more, the larger firm would want to take some money out of the pot. Second, there’s no reason for the smaller competitor to spend anything. It is unwilling to spend any dollar beyond the 300,000th, because its marginal benefit to the industry is under $10 and its marginal benefit to the firm is under $1. Suppose the larger firm were going to spend $600,000 and the smaller firm were going to spend $300,000. These would not be equilibrium actions: given that the larger firm is already spending more than $300,000, the smaller firm wouldn’t be willing to spend even a single dollar. The only equilibrium is where the larger firm spends $900,000 and the smaller firm spends $0. The smaller actor entirely free rides off the larger one. The result is what Mancur Olson (1965) calls the “systematic tendency for ‘exploitation’ of the great by the small.”

Industry Shares versus Real Shares

If one accepts the assumption that the probability of success only depends on the total amount of money in the pot, this simple model can accommodate many institutional details of privatization. The total free-riding result happens whenever one actor has a lower threshold than the other, for whatever reason. In the original story, the two firms were identical except that one had 90 percent of the industry and the other had 10 percent. But one’s threshold could be lower for other reasons as well.

For instance, suppose the government not only breaks up the monopoly but also subjects its revenues to a 50 percent tax. The 90 percent firm will act as though it controlled 45 percent of the industry, and the 10 percent competitor, if subject to the same tax, will act as though it controlled 5 percent. These new percentages—call them “real” shares—no longer need to add up to 100 percent, but they convey the idea that firms’ spending thresholds are lower when, for whatever reason, their benefits decrease.

After we determine everyone’s real shares, the same analysis applies as before: the dominant firm does all the advocacy, and the other firm is a free rider. The difference is that dominance is determined by looking not at market proportions but at shares of total industry revenue. Thus, if the 90 percent firm’s revenues are taxed at a 90 percent rate, it acts as though its share is 9 percent; and if the 10 percent competitor is exempt from the tax, it acts as though its share is the full 10 percent. The apparently smaller firm has become dominant, and the free-riding relationship reverses itself.

Anything that affects one’s revenues affects one’s real share. Suppose, for instance, that the 90 percent firm is actually a monopoly over 90 percent of a geographic area, while the remaining 10 percent of the area is divided among 100 competitors who act according to the textbook perfect competition model in which everyone makes zero economic profits. Then those competitors—and thus that entire 10 percent of the market—act as though they had a 0 percent share of the industry.

Or, as a final example, suppose the 10 percent firm is better at advocacy, so that each dollar it spends on advocacy is twice as effective as each dollar spent by the 90 percent firm. Then it acts as though its share is 20 percent, and its threshold goes up accordingly. All these considerations affect the firms’ real shares for purposes of choosing how much to spend on advocacy.

Does Privatization Always Reduce Advocacy in This Model?

This model applies straightforwardly to privatization: partial privatization splits an industry into public and private sectors, much as one can split a monopolist into competing firms. To be sure, the public sector isn’t a profit maximizer like a private firm. But the concept of profit maximization needn’t be interpreted in a narrow financial sense. Heads of government agencies still pursue goals of some sort and obtain some benefit when their agency provides a service.

Moreover, agencies aren’t the only actors. The employees of the agencies, through their unions, also enjoy some benefit from public provision of the service, and they also participate in political advocacy. The challenge is to determine who the relevant actors are and what benefits they might plausibly seek to maximize.

The model implies, at a minimum, that some privatization will decrease advocacy, for two reasons. First, as long as privatization doesn’t exceed a critical threshold, the public sector will dominate the private sector in terms of real share. Therefore, the model predicts that, up to that threshold, the private sector’s advocacy will be zero. Second, as privatization increases, the size of the public sector falls, and thus the aggregate benefits of service provision to the public sector fall. Because the public sector is smaller, its advocacy falls accordingly.

How far can we continue to privatize before advocacy stops falling? As privatization increases, the second step always holds—by definition, privatization shrinks the public sector. The first step, however, doesn’t hold for large enough levels of privatization. With enough privatization, the private sector dominates the public sector, at which point the private sector does all the advocacy, with the public sector acting as a free rider. From then on privatization increases advocacy. We may call the threshold level of privatization at which advocacy stops falling an “advocacy-minimizing privatization level.”

For instance, suppose a firm is divided into two firms whose profit is proportional to their share of the industry. Then the advocacy-minimizing breakup is an equal split of the industry. If a split in the industry creates a splinter firm that is twice as profitable as the incumbent firm, or perhaps twice as slick, then the advocacy-minimizing split is 67 percent to 33 percent, again allocating each firm an equal real stake in the system.

Applying This Model to the Real World

What Does the Model Predict About Prisons?

Now let’s apply the theory to prisons, where “industry-expanding lobbying” means “pro-incarceration advocacy.” I use the term “advocacy” broadly to include any use of political influence, licit or illicit, including endorsements, political contributions, lobbying, and bribes. And I use the term “incarceration” as shorthand to include the criminalization of a greater range of behavior, more active enforcement, greater reliance on imprisonment, longer sentences, and less parole—anything that increases person-years in prison. Endorsing a politician for being tough on crime, donating money to a three-strikes initiative, or testifying in favor of a “truth in sentencing” law all presumptively count as advocating incarceration.

Consider the main political actors in the prison industry: the private prison firms and the public corrections officers’ union. I only focus on these two actors here because the other potential prison-based actors—private-sector employees and departments of corrections—don’t participate in pro-incarceration advocacy. Private-sector workers aren’t unionized, which makes it hard for them to act collectively (Shichor 1995; Dolovich 2005), and public departments of corrections actually want fewer prisoners (Woodford 2006; Allen 2006; Huppke 2006). I also assume that the private sector acts as a bloc (instead of competitively, and instead of, at the opposite extreme, cooperating with the public sector in a grand prison coalition) because cooperation within a concentrated oligopoly isn’t that difficult. Firms interact with each other a lot and have ample opportunity to punish each other for non-cooperative behavior (Ayres 1987). Moreover, 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 harder than merely doing so among private firms. (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.)

Without privatization, the public sector is the monopoly provider of prison services, and the corrections officers’ union enjoys the benefits that flow from serving the whole system. As explained in the general model earlier, as part of the system is privatized, the public sector’s advocacy decreases, while the private sector free rides off the public sector. This will remain true provided the public sector stays the dominant sector. And at current levels of privatization, the public sector is indeed dominant. It has a larger industry share and extracts more benefit from the system than does the private sector.

We can perform some rough estimates to verify this. (I assume, following much of the economic literature on firms and unions, that firms maximize profits, and that unions maximize total “union rents”—that is, here, the difference between public sector and private sector wages times the size of the public sector. See Farber 1986.)

  • Industry share: The private sector has a smaller share of the industry. Of the 1.5 million prisoners under the jurisdiction of federal or state adult correctional authorities in 2004, 7 percent were held in private facilities (14 percent of federal prisoners and 6 percent of state prisoners). Among the 34 states with some privatization, the median percentage of private prisoners was 8 to 9 percent. If we’re interested in the private share of marginal prisoners—that is, how likely a prisoner is to go to a private prison if convicted today—the private share becomes larger, mainly because private firms have absorbed much of the recent growth in federal incarceration. A reasonable estimate of the private share of marginal prisoners over the period 2000–2005 yields 6 percent for state systems, 54 percent for the federal system, and 22 percent overall (U.S. Department of Justice 2004; U.S. Department of Justice 2005).
  • Private sector profitability: The profits of the private sector aren’t high; 10 percent would be a generous estimate (Volokh 2007).
  • Public sector rents: Public-sector correctional officers’ wages are quite a bit above—by about 30 to 65 percent—the wages of their private-sector counterparts (Criminal Justice Institute 2000a, 2000b). This is a lot of money, because wages are about 60 to 80 percent of most prisons’ operating expenses (Donahue 1989; Dolovich 2005; Logan 1990; Schlosser 1998; Shichor 1995).

These numbers are merely suggestive, not rigorous. But it should be intuitively plausible that public-sector actors extract substantially more benefit from any given prison than do private firms. It’s likewise clear that the public-sector unions have a greater share of the industry than do private firms. Thus, overall, the public-sector actors enjoy a greater benefit from prison provision than the private-sector actors do, perhaps by an order of magnitude. This model predicts that the public-sector unions should be doing all of the pro-incarceration advocacy, and the private firms should be entirely free riding.

Is This Realistic?

The theoretical model and rough numerical estimates predict that pro-incarceration advocacy should come from the public sector, not the private. Are such simple, highly stylized models realistic? In the case of prisons, the simple model may be close to true. As I document later, there’s a lot of hard evidence of pro-incarceration advocacy by public corrections officers’ unions (though a small part of union advocacy cuts the other way). But there’s virtually no evidence of private-sector pro-incarceration advocacy. This may simply mean that the private sector advocates incarceration secretly. But, in light of the theory, it may be more plausible that the private sector simply is a free rider, saving its political advocacy for policy areas where the public good aspect is less severe—pro-privatization advocacy.

But this model doesn’t need to be literally realistic. Advocacy needn’t be an entirely public good, and the smaller actors in the industry needn’t be complete free riders. The point is merely that these assumptions are plausible, perhaps even likely. Advocacy has some public-good aspects, and free riding happens to some extent in the world. If people act enough like this model, privatization can still, on balance, reduce total pro-incarceration advocacy.

This plausible scenario rebuts the simple anti-privatization claim that privatization does increase pro-incarceration advocacy. (The extended models presented later on, in which the effect of privatization on advocacy is ambiguous, further rebut the simple unidirectional claim.) This scenario also points out a potential irony in the position of some incarceration opponents who, so as to avoid “reinforc[ing] the incarceration boom by introducing the profit motive into incarceration” (Sarabi and Bender 2000), would make common cause with public corrections officers’ unions, who concededly are active lobbyists for incarceration.

Next time: What sort of lobbying exactly do public corrections officers’ unions and private prison firms actually do?