Economics Nobel Prize 2016 winner Oliver Hart showed the danger of private prisons

ByJames Dennin

Harvard economist Oliver Hart — one of two latest winners of the 2016 Nobel Prize for economics announced Monday — has known for a while that private prisons don't work.

Undertrained, overly-violent guards, for example, are the consequence of economic forces, he suggested in a 1996 paper for the National Bureau of Economic Research: Privatization increases pressure to cut labor costs — both pay and funding for training — which "can lead to a substantial deterioration of quality."

In one instance, Hart described, guards at one New Jersey facility were so undertrained that they fled during one 1995 prison riot — eventually calling the police from a payphone. 

The Justice Department came to similar conclusions recently, announcing in August it would phase out the use of for-profit correctional facilities. The announcement followed a bombshell Mother Jones undercover investigation published in June that revealed horrors inside for-profit facilities like prisoners losing fingers to gangrene, inmates getting stabbed — and unchecked prison guard violence.

Such violence is no accident, Hart's research suggested: It is a consequence of the structure of government contracts with private companies — and the fact that private prisons are incentivized to slash costs.

Indeed, both Hart and fellow 2016 Nobel Prize-winner Bengt Holmström of the Massachusetts Institute of Technology were awarded because of their study of business contracts — and, in general, the way that agreements can incentivize or disincentivize desirable (or less desirable) behavior.

Their 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.

And Holmström's work has examined the risks in contracts that base salaries on performance: For example, if you peg teachers' salaries to easy-to-measure factors like student exam scores — as a proxy for "performance" — that can push educators to de-prioritize teaching abstract skills like "creativity and independent thinking."

Hart and Holmström are not quite household names like other recent economics Nobel Prize winners — including left-leaning economist Paul Krugman. But the 2016 announcement was greeted by other economists as "long overdue." 

Both Finnish-born Holmström and British-born Hart are immigrants residing in the United States.

Holmström and Hart will share the prize — worth 8 million Swedish krona — or about $926,000.