The market for public-private contracting is huge and flawed. Public-private contracts for services such as prisons and welfare administration tend to result in cost savings at the sacrifice of quality service. For instance, to cut costs, private prisons skimp on security. Public law scholars have studied these problems for decades and have proposed various public law solutions. But the literature is incomplete because it does not approach the problem through a commercial lens. This Article fills that gap. It considers how economic analysis of contract law, in particular efficiency theory and agency theory, bear upon the unique problems of public-private contracting.
Public-private contracts are subject to systematic biases that cause the parties to impose a cost on service recipients in the form of low quality service. Because there is essentially no competitive market for these services, the contracting parties are not forced to internalize these costs. As a result, contracts tend to be underpriced. Thus, what appears to be a cost-saving mechanism is often, in fact, a systematic market failure …
Wendy Netter Epstein. 2012. “Contract Theory and the Failures of Public-Private Contracting” ExpressO, bepress.com.