The 2016 Economics Nobel Prize Winner's Case Against Private Prisons: Contracts Are The Key

Oliver Hart and Bengt Holmström were the two winners of this year’s Nobel Prize for economics for their “contribution to contract theory” in the '70s and '80s.

Hart, now based at Harvard University, has been a long-time critic of the private prison system. Twenty years ago, he wrote a paper for the National Bureau of Economic Research where he suggested that privatization of prisons created pressure to cut costs and increase profits, and this translated into under-trained, under-paid, overly-violent guards.

Two decades later, the U.S. Justice Department finally arrived to a similar conclusion and decided to phase out the use of private prisons, arguing that these facilities were not run as safe, efficient or effective as government-run prisons.

Related Link: Corrections Corp., GEO Group Shares Rebounding As Companies Issue Responses To DoJ News

But the extreme violence and poor living conditions in these prisons is no coincidence, Hart contended. Taking a page or two from his previous research, he claimed that the roots of the issue could be traced to how the contracts between these private companies and the government were structured.

Interestingly, Hart and Holmström research “has wide implications: Hart's conclusions about privatization, for example, may extend beyond prisons to decisions about whether education and even garbage collection should be public or private,” a recent Mic article pointed out.

Some companies that are very likely not big fans of Hart include private prisons operators The GEO Group Inc GEO and Corrections Corp Of America CXW.

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Disclosure: Javier Hasse holds no interest in any of the securities or entities mentioned above.