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 19^th-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 of the system.