Privatization and Corruption : Patronage vs. Spoils

We examine the issue of privatization of those public goods that can be provided in-house or contracted out. Such privatization appears straightforward, yet history shows otherwise. For example, the private contracting system for street cleaning in 19th-century New York City was a failure, despite the safeguards instituted to ensure competition. The contract system was criticized for corruption, while in-house provision suffered from patronage abuses. We present two variations of the ``rotten apple" theory to capture the salient features of the New York experience. The public officials and contractors were both operating under high-powered incentives, which invited opportunism. When players act strategically, the adverse effect of opportunism increases. Since the amounts of spoils can be larger than political contributions, contracting-out ends up being more costly, even though competition promotes productive efficiency. Another advantage of in-house provision is that incentives can be made low-powered by depoliticizing the system