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COPYRIGHT 2008 Stanford Law School
INTRODUCTION
I. ADVOCACY AS A PUBLIC GOOD A. The Basic Model B. Industry Shares Versus "Real" Shares C. Does Privatization Always Reduce Advocacy in This Model? II. APPLYING THIS MODEL TO THE REAL WORLD A. Different Kinds of Lobbying in the Real World B. What Does the Model Predict About Prisons? C. Is This Realistic? D. Public Corrections Officers Unions E. Private Prison Firms F. Sometimes, No Smoke Means No Fire III. OF FIRMS, UNIONS, AND COOPERATION A. Why Focus on Public-Sector Unions and Private Firms? B. Who Cooperates with Whom? IV. COMPLICATING THE MODEL A. Allowing Money to Change Candidates' Positions B. Anti-Incarceration Advocacy C. Relaxing the Assumption of Fungible Money D. Strong and Weak Unions CONCLUSION
INTRODUCTION
Over ninety years ago, opponents of World War I alleged that "munitions manufacturers frighten the popular mind with the fear of imaginary external enemies and inflame it with murderous patriotism." (1) According to a view attributed to Stefan Zweig, the war began only when "newspapers in the pay of the arms manufacturers began to whip up sentiment against Serbia." (2) After the war, that accusation morphed into the charge that arms makers were self-interestedly obstructing peace efforts. (3) Today, an opponent of U.S. military policy characterizes defense contractor CACI International, Inc., (4) whose chairman speaks publicly of the "heinous[ness]," "fanatical horror," and "barbarism" of terrorism, (5) as "one of the most unabashed corporate backers of Bush's foreign policy and a key supporter of the military campaigns in Iraq and Afghanistan." (6) Critics also charge that private military interests affect what weapons systems we rely on (7) and what alliances we enter into, (8) and that, in some countries, those interests may even take over the government. (9)
This theme--that private contractors use their influence to advocate not just more privatization but also, insidiously, changes in substantive policy--sweeps more broadly than just defense contractors. The following list gives a sense of the generality of the accusation; the last few items illustrate that the critique comes from "the right" as well as from "the left."
* Private prison firms are often accused of lobbying for incarceration because, like a hotel, they have "a strong economic incentive to book every available room and encourage every guest to stay as long as possible." (10)
* Business improvement districts--coalitions of business and property owners, many of which have their own private security forces--have lobbied municipalities for, among other things, aggressive panhandling ordinances. (11)
* A toll road developer in Colorado has lobbied for statutory changes to preempt county authority to set toll rates, (12) and a private road construction firm has been accused of contributing to Texas Supreme Court justices' campaign chests to influence a potential eminent domain suit related to a toll road in the state. (13)
* Private landfill companies have been accused of lobbying for weak environmental regulation of landfills (14) and opposing recycling initiatives. (15)
* Private water-supply owners have been accused of "lobbying to weaken water quality standards ... and pushing for [trade agreements] that hand over the U.S. water resources to foreign corporations," (16) and private water utilities have been accused of fighting conservation efforts. (17)
* Private redevelopment corporations, which have the power to condemn private property for purposes of "urban renewal," have opposed reform of eminent domain laws in the wake of the Supreme Court's decision in Kelo v. City of New London. (18)
* And "private attorneys general," for instance environmental groups (19) that benefit from fines available under environmental citizen suit provisions, (20) or members of the securities plaintiffs' bar (21) who benefit from the availability of securities fraud class actions, (22) fight for the continued vitality or even strengthening of the statutes under which they litigate. (23)
In this Article, I examine this "political influence" challenge to privatization using the case study of private prisons. I conclude that, in the prison context, there is at present no reason to credit the argument. At worst, the political influence argument is exactly backwards, by which I mean that privatization will in fact decrease prison providers' pro-incarceration influence; at best, the argument is dubious, by which I mean that its accuracy depends on facts that proponents of the argument have not developed.
Private prisons are a useful case study. First, they are a growth industry, having progressed from humble beginnings in the late seventies and early eighties to now house about one in sixteen prison inmates nationwide. (24) Second, the opponents of private prisons commonly make the political influence argument.
For example, in a recent Duke Law Journal article, Sharon Dolovich writes that "the legitimacy of punishment" is threatened "whenever parties with a financial interest in increased incarceration are in a position to exert influence over the nature and extent of criminal sentencing. If this concern is real" (25)--and she suggests that it may well be (26)--prisons should not be privatized because "the state ought not to foster yet another potentially influential industry that could seek to compromise further the possibility of legitimate punishment to promote that industry's own financial interests." (27)
David Shichor, a prominent contributor to the prison privatization literature, opposes prison privatization (28) in part because:
Through political lobbying, PACs, campaign contributions, and the provision of perks to politicians (as industrial and business corporations do), corporations are likely to continue to support and even accelerate incapacitation-oriented legislation and policies by which more people will spend longer periods of time in correctional institutions. Conversely, this trend may diminish the emphasis on alternative programs and will result in the pursuance of the "Hilton Inn mentality," that is, trying to maintain high occupancy rates for profit purposes. (29)
And Brigette Sarabi and Edwin Bender's thesis is clear from the title of their report, The Prison Payoff" The Role of Politics and Private Prisons in the Incarceration Boom, in which they argue that prison privatization should be resisted in part because private prison firms have a "vested financial interest[] in increasing rates of imprisonment." (30) This is only a small sample of the literature. (31) For a sample of the art, see Figure 1. (32)
I assume, for purposes of this Article, that the concern underlying this critique is reasonable--that is, that economically self-interested pro-incarceration advocacy is undesirable. (33) This concern, however, fails to support the argument against privatization for several reasons.
[FIGURE 1 OMITTED]
First, self-interested pro-incarceration advocacy is already common in the public sector--chiefly from public-sector corrections officers unions. For instance, the most active corrections officers union, the California Correctional Peace Officers Association, has contributed massively in support of tough-on-crime positions on voter initiatives and has given money to crime victims' groups, and public corrections officers unions in other states have endorsed candidates for their tough-on-crime positions. (34) Private firms would thus enter, and partly displace some of the actors in, a heavily populated field. (35)
Second, there is little reason to believe that increasing privatization would increase the amount of self-interested pro-incarceration advocacy. In fact, it is even possible that increasing privatization would reduce such advocacy. The intuition for this perhaps surprising result (36) comes from the economic theory of public goods and collective action.
The political benefits that flow from prison providers' pro-incarceration advocacy are what economists call a "public good," because any prison provider's advocacy, to the extent it is effective, helps every other prison provider. (We call it a public good even if it is bad for the public: the relevant "public" here is the universe of prison providers.) (37) When individual actors capture less of the benefit of their expenditures on a public good, they spend less on that good; and the "smaller" actors, who benefit less from the public good, free ride off the expenditures of the "largest" actor.
In today's world, the largest actor--that is, the actor that profits the most from the system--tends to be the public-sector union, since the public sector still provides the lion's share of prison services, and public-sector corrections officers benefit from wages significantly higher than their private-sector counterparts'. The smaller actor is the private prison industry, which not only has a smaller proportion of the industry but also does not make particularly high profits.
By breaking up the government's monopoly of prison provision and awarding part of the industry to private firms, therefore, privatization can reduce the industry's advocacy by introducing a collective action problem. The public-sector unions will spend less because under privatization they experience less of the benefit of their advocacy, while the private firms will tend to free ride off the public sector's advocacy. (38) This collective action problem is fortunate for the critics of pro-incarceration advocacy--a happy, usually unintended side effect of privatization. One might even say that prison providers under privatization are led by an invisible hand to promote an end which was no part of their intention.
This is the simplest form of the story, but one can also tell more complicated versions in which privatization does not necessarily decrease total industry-expanding political advocacy. After presenting my main model, I introduce a few realistic complications. I explain why I am focusing only on public-sector unions and private firms, and whether the individual private firms and the public sector compete or cooperate with each other on advocacy. I alter the assumption that money merely buys the passage of a pro-incarceration measure, and allow money to change the substance of the measure itself. I also relax the assumption that anti-incarceration advocacy is fixed. These complications do not change the basic result of the model. Other complications are more fundamental, and make the effect of privatization ambiguous--increasing private-sector advocacy but also decreasing public-sector advocacy. These complications include relaxing the assumption that the effectiveness of advocacy only depends on the total amount of money spent, and relaxing the assumption that the introduction of privatization into a state is exogenous. If those extensions of the model are closer to the truth, then total advocacy may rise--but it may also fall, depending on which effect dominates. We cannot determine the net effect a priori.
There is thus no reason to believe an argument against prison privatization based on the possibility of self-interested pro-incarceration advocacy--unless the argument takes a position on how lobbying, political contributions, and advocacy work, and why (for instance) any increase in private-sector advocacy would outweigh the decrease in public-sector advocacy. Either this argument against prison privatization is clearly false, or it is only true under certain conditions that the critics of privatization have not shown exist.
The analysis here not only sheds light on the prison privatization debate but also provides a roadmap for analyzing military contracting and other privatization contexts. Because privatization can affect the incentives of both the private and public sectors to wield political influence, one should not conclude that privatization distorts substantive policy in an undesirable direction unless one can tell a story, based on a plausible view of government agents' behavior, in which private-sector advocacy rises more than public-sector advocacy falls. In the end, each industry has its own idiosyncrasies, so I do not make a strong claim about the use of the argument outside of the prison context. But, at the very least, the use of the political influence argument is often theoretically unsound to the extent it ignores this comparative analysis.
Part I sets forth the main model of the paper. In this model, the sector with the greatest benefit from the expansion of the industry does all the advocacy, and the sector with the smaller benefit entirely free rides off the larger one. Accordingly, privatization reduces industry-expanding advocacy if, after privatization, the public sector remains the sector with the greatest benefit. Part II applies this theoretical model to prisons and suggests, based on an informal calculation, that the actors that would benefit the most from increased incarceration are indeed the public-sector corrections officers unions. Thus, we should expect the public sector to do all the pro-incarceration lobbying (though less than it would have done without privatization). That Part argues that the simple model, despite its stark result, may be quite close to the truth, as there is a wealth of evidence that public corrections officers unions advocate incarceration, and no such hard evidence on the private side. Part III elaborates on the model, explaining why it is appropriate to focus on public corrections officers unions and private prison firms as the relevant actors, and how cooperation within the prison industry affects the results. Part IV complicates the model in various ways. Some of these complications do not change the basic result of the simple model. Other complications make the result muddier, so that instead of unambiguously reducing advocacy, privatization has a theoretically ambiguous effect on the amount of industry-expanding advocacy.
I. ADVOCACY AS A PUBLIC GOOD
In this Part, I present the main model I use to predict how industry actors will react to privatization. (39) The central feature of the model is that industry-increasing advocacy is a public good. Privatizing part of the industry therefore introduces a collective action problem: unless everyone in the industry cooperates with each other, they will in aggregate spend less on industry-increasing advocacy than a single firm would if it covered the whole industry, because a portion of their expenditures will benefit their competitors.
This intuition should not be surprising, as it is standard in the literature on public goods. When a good is private, everyone pays for, and enjoys, only his own consumption. By contrast, when a good is public, in the classic model, everyone benefits from the total amount, and this amount is determined by the total amount of contribution. (40)
For example, if we benefit from our national defense, we benefit from the full amount, not just from the chunk we paid for; we cannot be excluded from the full benefit, no matter how little we paid; and the total amount of national defense is just determined by how much money Congress allocated to national defense from the Treasury. A tax-funded program that improves air quality benefits everyone who breathes the relevant air, whether or not they contributed to the program, and the total improvement is just determined by the amount of resources directed toward that goal.
Similarly, contributing to a candidate's campaign benefits all of his supporters, and it is not too implausible to say, as an approximation, that to the extent the money he raises and spends affects his probability of winning, it is only the total amount of money that matters. (41)
In all these cases, the temptation to free ride off one's peers' contributions is strong. (42) This Part illustrates the phenomenon of free riding in the context of political contributions.
A. The Basic Model
A monopolist is willing to invest some amount of money in lobbying to increase the size of his industry. To determine that amount, he weighs the benefit that his money can "buy"--the expansion of the industry is worth something to him, and money can help his policy pass--against the cost of the lobbying.
If that firm is broken up into two smaller firms--say a 90% incumbent firm and a 10% splinter firm--the larger incumbent is not willing to spend as much as it used to, because the costs of lobbying are the same while the benefits are 10% less than they used to be. And the smaller splinter firm will not be willing to spend anything, because it will be satisfied free-riding off the larger incumbent's lobbying. Thus, splitting up an industry can decrease total industry-expanding lobbying.
The rest of this Part illustrates this intuition graphically.
Suppose you are, as economists say, a rational, risk-neutral expected-utility maximizer. (43) One may dispute how much of life this assumption can explain, but on balance it seems to be at least a good starting point for predicting the behavior of business organizations. You are faced with the choice of whether or not to spend a dollar on political advocacy--donating to the campaign of a politician or voter initiative, contributing to your trade association's lobbying expenses, or running an ad--in favor of some reform that could increase the size of your market. We may assume that this dollar has some influence in the world, whether appropriate or inappropriate--it could corrupt a legislator, raise the chance of his election, contribute to the passage of the initiative, or change popular opinion. (44)
The benefit of this dollar is the value of the increased probability of getting your desired policy change. (45) It is reasonable to think that spending money on advocacy is subject to decreasing marginal returns, so each additional dollar gets you less and less benefit. (46) The cost of a dollar's worth of advocacy, on the other hand, is $1--and remains $1, no matter how many dollars you spend. As long as the benefit of an advocacy dollar is greater than $1, you continue spending. As soon as that benefit falls to $1, you stop spending. This is your optimal (47) total amount of advocacy spending--say $1 million. (48)
Figure 2 below illustrates the situation. The expected benefit--that is, the probability of success times the benefit--is represented by the curved line below: the more you spend, the greater the probability of success, but the less you get for each extra dollar. Because a probability cannot get any higher than 100%, the curve is bounded above by the dashed line representing the total benefit of the policy. The cost of advocacy is represented by the straight line below: $1 of spending on advocacy costs exactly $1. Your problem is to maximize the vertical distance between the expected benefit curve and the cost line. In Figure 2, the maximum distance occurs at a spending level of $1 million.
[FIGURE 2 OMITTED]
Figure 3 is an equivalent way of seeing the same problem.
[FIGURE 3 OMITTED]
The curve below represents the marginal expected benefit--that is, the benefit of an extra dollar of spending, which is equal to the total benefit times the extra probability of success that a dollar buys you. As noted above, the marginal benefit is decreasing. The straight line is the marginal cost of advocacy: an extra dollar of advocacy spending always costs $1. If the marginal expected benefit is above $1, you're not spending enough; if it is below $1, you should cut back. At a spending level of $1 million, an additional dollar of spending gives you exactly $1 of expected benefit.
Now suppose the Department of Justice's Antitrust Division comes in and splits you up, so that you now have 90% of the market and are faced with a competitor with the other 10%. Your previous optimal amount of spending, $1 million, is no longer optimal for you: the cost of that last dollar was $1, and while the benefit of the dollar is $1 for the whole industry, you, who now represent only 90% of the industry, only see 90 cents of that benefit. All your benefits are now lower by 10% because you have to share them with your competitor. (49) For our purposes, the split-up thus has the same effect as a 10% tax on your benefit. Because your spending on advocacy--an investment in the growth of your industry--is only 90% as productive, you do less of it. You start cutting back on your spending, because a dollar saved puts $1 back in your pocket and only reduces your benefits by 90 cents. As you cut back more, the benefit of the last dollar rises; you stop cutting back as soon as the benefit of your last dollar to the industry reaches about $1.11 (which is a $1 benefit to you). Your new amount is, say, $900,000.
[FIGURE 4 OMITTED]
This new situation is illustrated in Figures 4 and 5. In Figure 4, the top curve is the expected benefit to the whole industry (as before), and the second curve is your expected benefit, newly reduced now that you have only 90% of the industry. (50) The bottom curve is your 10% competitor's expected benefit. As discussed above, the maximum vertical distance between your curve and the cost line now occurs at $900,000; and say the maximum distance between your competitor's curve and the cost line occurs at $300,000.
[FIGURE 5 OMITTED]
On Figure 5, the equivalent graph that shows marginal quantities instead of total quantities, you want to find the point where the marginal expected benefit to the industry is $1.11. This is equivalent to finding the point where 90% of the marginal expected benefit (i.e., the benefit to you) is $1. That point again occurs at $900,000. Your competitor wants to find the point where the marginal expected benefit to the whole industry is $10, which gives him $1. This point is at $300,000.
This story is incomplete. You do not want the amount spent to be exactly $900,000; obviously, you would be thrilled if other people happened to contribute more. (51) It's just that you are not personally willing to put a dollar more into the pot if the pot already contains $900,000. You want the total amount spent to be at least $900,000, and you are willing to contribute money until that point is reached, but you are no longer willing to personally contribute once you are holding the 900,001st dollar. This is because, if the benefit of a dollar only depends on the total amount of money spent, and if the 900,000th dollar had a benefit to the industry worth $1.11 (and thus a benefit to you worth $1), then the 900,001st dollar has a benefit worth slightly less than $1.11.
Your new competitor, who represents the remaining 10% of the industry, and who is equally interested in this reform that will increase the size of the pie, by a similar reasoning, wants the total amount spent to be at least $300,000 and will not put a 300,001st dollar into the pot.
This leads to two conclusions. First, the total amount spent will be exactly equal to the larger actor's threshold--in this case, $900,000. If it were less, you, the larger actor, would want to spend more money. And if it were more, you would want to take some money out of the pot, since the dollars beyond the 900,000th are giving the industry a benefit below $1.11 and giving you a benefit below $1. Second, there is no reason for your competitor to spend anything. He is unwilling to spend any dollar beyond the 300,000th, since its marginal benefit to the industry is under $10 and its marginal benefit to him is under $1. Thus, suppose you were going to spend $600,000, and he was going to spend $300,000. These would not be equilibrium actions, (52) since he would prefer to keep his $300,000. Why should he spend any extra dollar beyond the $600,000 you are already spending, if the 300,001st dollar already is not worthwhile to him? Thus, the only equilibrium is where you give $900,000 and he gives $0. Because he is the smaller actor, he entirely free rides off you. (53) The result is what Mancur Olson calls the "systematic tendency for 'exploitation' of the great by the small." (54)
B. Industry Shares Versus "Real" Shares
If one accepts the fundamental assumption of this Part--that the probability of success only depends on the total amount of money in the pot--this simple model is flexible enough to accommodate many institutional details of privatization. The total free-riding result happens whenever one actor has a lower threshold than the other, for whatever reason. In this story, you and your competitor are identical except that you have 90% of the industry and he has 10%. But one's threshold could be lower for other reasons as well.
For instance, suppose that, to add insult to injury, the government not only breaks up your monopoly but also subjects your revenues to a high (50%) tax rate. The breakup already altered your spending threshold by shifting your curves down to 90% of their previous level (compare Figures 2 and 3 with Figures 4 and 5). Now, with the 50% tax, your revenue and marginal revenue curves shift further down--to 45% of their original levels. (If your competitor with a 10% share is subject to the same tax, his curves are 5% of the original industry curves.)
So the combination of the breakup and the tax makes you act like a firm with a 45% market share. These new percentages--call them "real" shares--no longer need to add up to 100% (in fact, with the 50% tax, they add up to 50%), but they convey the economic intuition that your spending threshold is lower when, for whatever reason, your benefits decrease.
After we determine everyone's "real" shares, the same analysis applies as before: the "biggest" firm does all of the advocacy, and the "smaller" firm is a free rider. The only difference is that we learn who is "biggest" not just by looking at proportions of the market but at shares of total industry revenue. Instead of calling this firm the "biggest" firm, we will call it the "dominant" firm. Thus, if the tax rate on your revenues...
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