The Incentives of Private Prisons

John F. Pfaff

Executive Summary

A common criticism of private prisons is that they encourage the firms running them to cut services, programming, and training, since cutting costs maximizes profit, and the resulting increases in recidivism actually help keep prisons full and the payments coming in. This is not, however, a problem with privatization per se, but rather with the contracts the state chooses to write. If the state were to impose different contract terms—terms that were tied to successful results, not just to the number of people held—then private firms would have an incentive to focus on improving the outcomes of the people held in their facilities. Two prisons, one in Australia and the other in New Zealand, have adopted contracts along these lines in recent years. While there have certainly been some initial struggles, these prisons suggest that contracts that encourage private firms to focus directly on reducing recidivism are feasible–and in fact may be easier to implement for private prisons than for public ones.

Key Findings:

• Private prisons do not focus well on re-entry and rehabilitation because the contracts they sign do not encourage them to do so—and in fact likely discourage them.
• It is possible to write contracts that incentivize rehabilitation and re-entry programming, either by tying payments to direct reductions in recidivism rates, or by providing bonuses when people held in the prison achieve “intermediate” outcomes that we know reduce reoffending, such as employment, education, or housing. Contracts can also penalize firms for events that make prisons more traumatic, such as violence.
• It seems likely that focusing on intermediate outcomes such as housing and employment are more practical than trying to reward reductions in recidivism directly, due to the challenges we face measuring recidivism.
• For these contracts to work, the incentive component much be a substantial portion of the payment (which has not been the case in Australia and New Zealand).

Key Recommendations:

• Given its extensive reliance on private prisons, Arizona has the potential to see real returns on rewriting its contracts with private institutions to encourage them to emphasize rehabilitation and re-entry programming.
• The contracts should likely focus more on how the firms can assist with successful re-entry outcomes, like securing—and maintaining—housing, employment, drug treatment and mental health therapy, etc., than on direct measures of “recidivism.”
• The incentive component should not be a small fraction of total payments, which would allow firms to claim they are now incentivized to focus on re-entry without facing much of a real incentive to change practices. The incentive component should be a substantial fraction of total payments, to make the incentive push meaningful.