Do Private Prison Contracts Fuel Mass Incarceration?

September 20, 2013

Private prisons have weathered a wave of criticism recently, as revelations about their poor security and lack of oversight have gone public. Now, a new report from In the Public Interest confirms that government contracts with private prisons not only fleece the taxpayer, but often create perverse financial incentives for states to lock up more people.

The study examined 62 private prisons contracts in 21 states. It found that the majority of these contracts guarantee that the state will supply enough prisoners to keep between 80 and 100 percent of the private prisons’ beds filled. If the state fails to fulfill this ‘bed guarantee’, it must pay a fine to the company running the prisons – in effect, paying for each prison bed regardless of whether it holds a prisoner. This incentivizes states to send prisoners to private prisons rather than state-run prisons in order to meet the bed guarantee, regardless of the prisons’ distance from families, their security level, or health conditions.

In effect, this ‘bed guarantee’ payment structure penalizes taxpayers for low incarceration rates. This is a system that hurts both taxpayer and prisoner. Bed guarantees funnel taxpayer money into private prison profits at a time when states should see overall cost savings from successful attempts at curbing crime. Instead, when states reduce incarceration rates below lockup quotas, they compensate companies’ lost revenue at the per day rate, adding up to millions of dollars in fines.

Under basic economic principles, firms that compete for and rely on government contracts want to decrease their costs while maximizing their revenue. Private prison companies are no exception – they reduce costs by cutting reentry and educational programs that would help reduce recidivism, and raise revenue by keeping government funding consistent through lockup quotas. Unsurprisingly, many private prison companies actually lobby for harsh criminal justice policies – like mandatory minimums and truth-in-sentencing laws – and against efforts to reduce mass incarceration. 

The report recommends that policymakers ban these lockup quotas.  Another reform could further reduce perverse incentives: implementing “results-oriented funding” in private prison contracts. Results-oriented funding brings company interests in line with those of the taxpayer by connecting payment to real public-safety priorities. For example, last year New York City created a program in which Goldman Sachs invested in a Rikers’ Island reentry program. The amount the City pays Goldman depends on whether the program meets certain goals for reducing recidivism. If contracts similar to these were instituted for private prisons, states could encourage private prisons to reduce recidivism and, in turn, reduce mass incarceration. It would also incentivize prison companies to provide better reentry services and health conditions, which are proven to reduce recidivism.

Perverse financial incentives are not unique to the state-corporation relationship. These problems persist across the criminal justice system, even for public agencies. For example, many law enforcement agencies operate on a numbers-based policing model, in which they are financially rewarded for hitting high arrest quotas. This incentivizes law enforcement to make high volumes of low-level arrests, instead of focus resources on investigating and solving violent crimes. To both reduce mass incarceration and get the most out of taxpayer money, policymakers should restructure these financial incentives and tie funding more directly to results proven to improve public safety.

(Photo: Corrections Project)