Where are privatization's cost savings? Private contracting, transaction costs, and prison operation efficiency

This dissertation examines the question: Where are privatization’s cost savings? Current literature finds that government privatization does not result in overall cost savings. This is contrary to widely accepted business practices and market theory. I hypothesize that transaction costs are obstructing efficiency in government contracting. Using a dataset comparing 419 state prison facilities from Wisconsin, Arizona, and Indiana, contracting patterns are examined over a period of five years. This dissertation uses Williamson’s Transaction Cost Economics framework to determine what types of contracting behavior result in prison facility operating cost efficiency, and which behavior patterns result in higher operating costs. Using a multivariate OLS regression analysis, I find that high transaction cost contracting patterns result in higher spending in prison facility operations when compared to patterns that are low in high transaction cost contracting. Policy implications include the benefits of privatization as long as transaction cost theory is taken into consideration. In this particular sample, using triangulation techniques, I find evidence that the high transaction cost contracting patterns are partly attributed to federal grants for mental health care. This opens up future investigations on the role of prisons in government-provided mental health care.