How should companies that operate private prisons be paid?

Private Prisons

I am not a proponent of privatizing prisons. Since I am not yet in charge, there are private prisons in the United States. In 2010 there were just under 100,000 people incarcerated in private prisons in the US. (Although no longer for federal prisoners). There are also private prisons in other countries, both the UK and Australia have a higher percentage of their prisoners in private prisons than the US does.

Payment per Inmate

Private prison operators get paid by the government. This takes several forms, but is typically based on the number of prisoners that are incarcerated[1]. For a profit-minded business, the incentives are clear: maximize the number of people incarcerated while keeping costs as low as possible. These motivations can reduce overall costs of prisons[2]-which is why privatized prisons can be attractive to governments.

This often doesn’t work out too well for inmates, private prisons tend to have more issues with violence, overcrowding, and general unpleasantness. A 2016 DOJ report found that privately run federal prisons were 9 times more likely to place prisoners in solitary confinement, and had higher levels of prisoner complaints on issues like food and treatment by prison staff.

Paying per inmate creates three different perverse incentives for the prison management company. First, unlike most of us, the company would prefer a world which has as many people incarcerated as possible. Second, they are encouraged to keep costs as low as they can get away with. This isn’t necessarily bad, a true efficiency gain is a genuine improvement, but excessive cost cutting can contribute to the problems cited above. Lastly, private prisons have no incentive to keep prisoners from reoffending, and may even have an incentive for them to come back to the prison after they have been released.

Melaleuca, Peterbourough, and Doncaster

In a women’s prison in Australia called Melaleuca, the last point is being addressed. For each prisoner that doesn’t return within two years Sodexo (the company that runs the prison) will get AUS $ 15,000. This is supposed to get the company to provide programs and services to reduce recidivism.

The UK has piloted similar programs at two privately run prisons for about half a decade now. At one prison, Peterbourough, the project is conducted through a Social Impact Bond.[3] At another prison, HMP Doncaster, Prison management company Serco’s payments are partially dependent upon the reconviction rate of released prisoners. If the rate does not fall from 58% to 53% the government will get 10% of the value of the contract back, if it falls below 52% Serco will be entitled to additional payments.

One motivation behind these sorts of programs is that the government only needs to pay for programs that are successful in meeting a certain target. Programs that do not meet their goals do not cost the government anything. This should allow for attempting a greater variety of programs and policies. 

Did it work?

Despite somewhat positive early results, the most recent results out of the prisons were mixed. At Doncaster, the most recent cohort of released prisoners had a proven reoffending rate of 54.6% as this is greater than the 53% target, Serco must pay back part of the contract. At Peterborough, larger scale policy changes meant that the social impact bond could not be properly evaluated.

The success of the individual programs and policies used to reduce recidivism need to be evaluated separately from the general payment policies. Just because recidivism was not reduced does not mean that the pay for success program failed. It just means that the programs used to reduce recidivism were not as successful as hoped. Maintaining these sorts of payment schemes should encourage companies to experiment with different policies and ideas.


Careful What You Pay For

Having some payment based on reoffending is almost certainly an improvement over simply paying on a per prisoner basis, but it is not without risks. The advantage of any sort of metric based rewards system is that it encourages performance on a certain specific metric. The problem with these systems is that they encourage performance on a certain specific metric. Funders will get exactly what they pay for and very little else.

There are myriad examples of this happening: Food corporation Green Giant had a problem, customers kept finding bits of insects in their bags of frozen peas.  Presuming their customers were not fans of entomophagy, Green Giant management decided to institute a rewards system for workers who found insect parts. The employees started finding many insect parts, because they were bringing insects from home, just to ‘find’ them and claim the reward[4].

How to reduce reoffending (without doing any work)

Even without outright fraud, there are lots of ways for a company to meet a target without actually making improvements. Imagine a prison which exclusively makes money from rehabilitating prisoners. Pretend the prison management company gets paid $10,000 for every year a released prisoner goes without committing a crime, and that this is its only source of funding. The prison management company likely would do some of the following[5]:

  • Try to house inmates who are unlikely to commit crimes after their release. The most valuable inmates are the ones who are least likely to commit crimes in the future. Additionally, the prison will try to avoid those people who it deems more likely to commit crimes in the future.
  • Release a lot of prisoners. A prisoner in prison has no chance of making the prison any money, whatever the prison can do to get people out so they can not commit crimes, it will do.
  • Take In a lot of prisoners. To release as many as possible, the prison management company will need to get as many people into the prison as possible.
  • Provide services for those that can be cheaply helped. It might benefit the prison’s bottom line to fund programs that increase the likelihood of someone not reoffending in the future. They will not offer these programs for everyone, but just for the prisoners who they believe are worth the cost.
  • Release young prisoners. If a prisoner is released at 25 and lives a crime free life until they are 80, the company will get $550,000. A prisoner who is released at 60 and lives a crime free life until 80 is only worth $200,000 to the company. This means that younger prisoners are more likely to get whatever services the company can offer, and older prisoners are likely to be ignored.
  • Keep costs as low as possible. Presumably the prison would still need to house prisoners for the duration of their sentences. It would have no incentive to fund improvements, unless it thought these improvements would help recidivism.


Most of these depend on the particulars of the exact payment metric. A payment metric that paid out based on the percentage of released prisoners who reoffended, would not encourage prisons to take in and release as many prisoners as possible.

A single clear metric is very easy to manipulate. It is likely better to use a lot of metrics. Prison management companies could be paid based on how many prisoners they housed, how many went on to commit crimes, the number of violent incidents, the type of prisoners, and possibly dozens of other metrics. While this might be harder to manipulate, it is also harder to keep track of, and may be difficult to find the right balance of metrics and payments.

All payments are based on some sort of metric. Currently that metric is the number of prisoners incarcerated. In select prisons, such as Melaleuca, another metric involving recidivism has been added. While finding the perfect mix of metrics is somewhere between difficult and impossible, improving on the current system seems manageable. Certainly, it is worth trying.







References, Sources, and Further Reading





[1] In addition, many contracts provide a guaranteed income for the prison company regardless of how many prisoners they actually house.

[2] Although it is not clear if they actually do

[3] A social impact bond allows private parties to pay the upfront costs of a program, and the government only pays the investors if certain targets are met. Private parties buy into the social impact bond, the money from which is used to provide programs (mostly mentorship) to help short term prisoners not reoffend. If the reoffending rate does not drop by 7.5% The investors don’t get any money.


[5] Admittedly, I do not know what sort of control prison management companies have on decisions of release and who enters the prison. I would guess their roles in these things are largely indirect.


2 thoughts on “How should companies that operate private prisons be paid?

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s