The prisoners dilemma – the economic issues of America’s for-profit prisons

Many economics students will be familiar with the prisoner’s dilemma – the game theory scenario illustrating how two parties, in this case prisoners, can make decisions against their better interests. Yet for many the term ‘prisoners dilemma’ may conjure up an altogether different problem. These are the people involved in the United States’ for-profit prison industry, who face the myriad of moral hazards involved in profiting from incarceration. This article explores these issues and the wider economics of incentivized incarceration within America’s ‘prison-industrial complex’.

The roots of the United States’ private prison boom lie date back to the War on Drugs of the early 1970’s. With the advent of tough new sentences for drug offences the nation’s prison population exploded. Between 1970 and 1980 alone the country’s prison population rose by 40%. Of course as the inmate population soared so did the costs of keeping them behind bars. Before long state and local governments were looking towards the private sector to help cut costs. In 1984 Tennessee awarded the first contract for an entire prison’s operations to a private corporation. Today private prisons hold an estimated 133,000 inmates, or 8.4% of the country’s prison population.

For many governments, contracting private prison operators makes sense – the theory being that profit-driven corporations will be able to run them more cost-effectively than bloated government bureaucracies. As a result the two largest private prison operators in the US alone take in $3 billion a year. The majority of this revenue comes from governments who pay the prison-operators on a per-prisoner per-day basis. As a result of this pay-per-prisoner system and the drive to cut costs, America’s private prison system has spawned a range of interesting – and often frightening – markets.

Unlike a typical service provider, a private prison’s revenue is tied to its inmate population. This has spawned a trade in inmates between private prisons, with the operators of full prisons shipping new inmates off to other nearby prisons in pseudo-trade partnerships. Some private prisons have even offered to house inmates from Guantanamo Bay in an effort to fill beds and increase revenues. The demand for inmates has also created a multi-million lobbying effort by the industry aimed at increasing prison sentences and lowering the threshold for arrests. In one high-profile case, private prison lobbyists provided campaign contributions to 30 of 36 state legislators in Arizona who co-sponsored an anti-immigration bill certain to increase the demand for prison beds. While such strategies may have boosted revenues, they have not stopped private prisons aggressively cutting costs as well.

As far as many states are concerned, private prisons have at least lived up to their reputation as ruthless cost cutters. Unfortunately such cuts are often to rehabilitation services and treatment. Nowhere is this more pronounced than Louisiana, where the majority of inmates live in private prisons. Louisiana pays private prisons $24 per prisoner per day, the lowest figure of any state by far and half as much as it spends on inmates in state prisons. This is partly because the programs offered by state prisons, like opportunities to learn trades and even a degree, are markedly absent from the private prisons. The most private prisons generally offer is high school certificate classes and inmate-led support groups. It is hardly a surprise then that half of Louisiana’s criminals end up behind bars within five years of release (further increasing profits for prison operators).

While the US private prison system undoubtedly faces issues, private prisons do not have to operate poorly. The prison and rehabilitation system of the future may indeed involve private players, but it will undoubtedly be one with far more accountability than today’s system. Private prisons may reduce state spending, but the costs of incarceration stretch far beyond government budgets. Only when we remove the incentive to put people behind bars can the real cost-cutting begin.

2 thoughts on “The prisoners dilemma – the economic issues of America’s for-profit prisons”

  1. Interesting topic!

    Can’t help but notice a similar situation with universities in Australia (although i would hope students are not traded as a commodity).
    Perhaps incentives could be aimed at the quality of outcomes, in this case rehabilitation.

  2. Interesting, Phil. This is quite disturbing. Are there any instances you know of overseas where there are different funding arrangements (other than per-prisoner, per-day) for private prisons? It makes me wonder (conspiratorially) if the US private prison lobbyists have acted on their vested interests in the War on Drugs, too.

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