The Volokh Conspiracy - 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.

(click here to read the rest of the post)

This is the simplest form of the story, but one can also tell more complicated versions of the story in which privatization doesn't necessarily decrease industry-expanding political advocacy. After presenting my main model, I introduce a few realistic complications into the model to show how the effect of privatization could be ambiguous—increasing private-sector advocacy but also decreasing public-sector advocacy. If those extensions of the model are closer to the truth, then total advocacy may rise—but it may also fall, depending on which effect dominates. We cannot determine the net effect a priori.

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 (for instance) increases in private-sector advocacy would outweigh the decrease in public-sector advocacy. Either this argument against prison privatization is clearly false, or it is only true under certain conditions that the critics of privatization have not shown exist.

The analysis here not only sheds light on the prison privatization debate but also provides a roadmap for analyzing military contracting and other privatization contexts. Because privatization can affect the incentives of both the private and public sectors to wield political influence, one shouldn't conclude that privatization distorts substantive policy unless one can tell a story, based on a plausible view of government agents' behavior, in which private-sector advocacy rises more than public-sector advocacy falls. In the end, each industry has its own idiosyncrasies, so I do not make a strong claim about the use of the argument outside of prisons. But, at the very least, the use of the political influence argument is often theoretically unsound to the extent it ignores this comparative analysis.

* * *

In later posts, I'll set forth my main model. In this model, the sector with the greatest benefit from the expansion of the industry does all the advocacy, and the sector with the smaller benefit free-rides off the larger one. Thus, privatization will reduce industry-expanding advocacy if, after privatization, the public sector remains the sector with the greatest benefit.

Then, I'll apply the theoretical model to prisons and suggest, based on an informal calculation, that the actors that would benefit the most from increased incarceration are indeed the public-sector corrections officers' unions. Thus, we should expect the public sector to do all the pro-incarceration lobbying (though less than it would have done without privatization). This simple model, despite its stark result, may be quite close to the truth, as there is a wealth of evidence that public corrections officers' unions advocate incarceration, and no such hard evidence on the private side.

I'll explain why it is appropriate to focus on public corrections officers' unions and private prison firms as the relevant actors, and how cooperation within the prison industry affects the results. Finally, I'll complicates the model in various ways. Some of these complications don't change the basic result of the simple model. Other complications make the result muddier, so that instead of unambiguously reducing advocacy, privatization has a theoretically ambiguous effect on the amount of industry-expanding advocacy.

(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 3 -- The Model:
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 4, 2007 at 9:56am] Trackbacks 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. (click here to read the rest of the post) This is the simplest form of the story, but one can also tell more complicated versions of the story in which privatization doesn't necessarily decrease industry-expanding political advocacy. After presenting my main model, I introduce a few realistic complications into the model to show how the effect of privatization could be ambiguous—increasing private-sector advocacy but also decreasing public-sector advocacy. If those extensions of the model are closer to the truth, then total advocacy may rise—but it may also fall, depending on which effect dominates. We cannot determine the net effect a priori. 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 (for instance) increases in private-sector advocacy would outweigh the decrease in public-sector advocacy. Either this argument against prison privatization is clearly false, or it is only true under certain conditions that the critics of privatization have not shown exist. The analysis here not only sheds light on the prison privatization debate but also provides a roadmap for analyzing military contracting and other privatization contexts. Because privatization can affect the incentives of both the private and public sectors to wield political influence, one shouldn't conclude that privatization distorts substantive policy unless one can tell a story, based on a plausible view of government agents' behavior, in which private-sector advocacy rises more than public-sector advocacy falls. In the end, each industry has its own idiosyncrasies, so I do not make a strong claim about the use of the argument outside of prisons. But, at the very least, the use of the political influence argument is often theoretically unsound to the extent it ignores this comparative analysis. * * * In later posts, I'll set forth my main model. In this model, the sector with the greatest benefit from the expansion of the industry does all the advocacy, and the sector with the smaller benefit free-rides off the larger one. Thus, privatization will reduce industry-expanding advocacy if, after privatization, the public sector remains the sector with the greatest benefit. Then, I'll apply the theoretical model to prisons and suggest, based on an informal calculation, that the actors that would benefit the most from increased incarceration are indeed the public-sector corrections officers' unions. Thus, we should expect the public sector to do all the pro-incarceration lobbying (though less than it would have done without privatization). This simple model, despite its stark result, may be quite close to the truth, as there is a wealth of evidence that public corrections officers' unions advocate incarceration, and no such hard evidence on the private side. I'll explain why it is appropriate to focus on public corrections officers' unions and private prison firms as the relevant actors, and how cooperation within the prison industry affects the results. Finally, I'll complicates the model in various ways. Some of these complications don't change the basic result of the simple model. Other complications make the result muddier, so that instead of unambiguously reducing advocacy, privatization has a theoretically ambiguous effect on the amount of industry-expanding advocacy. (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 3 -- The Model: Privatization and the Law and Economics of Political Advocacy, Part 2: Privatization and the Law and Economics of Political Advocacy: Volume-mates with Orin: