Do Incentive Contracts Work?

My colleague Eli Oaks recently wrote about Arizona’s opportunity to hold private prison operators accountable to outcomes. One of the bills, the Private Prison Performance Act, had the potential to revolutionize how contract corrections operates. The bill died, but the idea lives on. 

In summary, the bill requires that secure contracting organizations be paid the full contract amount only if they can beat the state-run facilities on two key metrics for former offenders: a reduction in returns to prison, and an increase in job placement rate. As long as the provider can improve each of these metrics by five percentage points, the organization receives the full contract amount. For each percentage point improvement beyond five points, the organization receives bonus incentive payments, encouraging further gains beyond what’s “required” by contract. 

This contract structure is backed by research. In order for performance-based contracts for corrections to work, researchers at the Institute of Public Affairs recommended “recidivism incentives should be bonuses rather than penalties” and that “private prison contracts should be structured so that operators cannot make their margins without the recidivism bonuses.” 

Fordham Law Professor and criminologist John Pfaff, author of Locked In: The True Causes of Mass Incarceration and How to Achieve Real Reform said the same in his essay “The Incentives of Private Prisons.” Pfaff highlighted the lack of accountability and aligned incentives when states adopt per diem contract structures, which constitute nearly all private prison contracts currently. Instead, Pfaff looks to incentive contracts to focus on cutting recidivism, and even highlights Arizona as a prime state to lead this reform.

Arizona would be a leader in the United States if it adopted performance-based contracting for prisons, but not the first in the world. Australia, New Zealand, and the United Kingdom have all adopted performance-based contracts in some form with varying levels of success, mostly due to differences in contract structure. The contracts that aligned with the bill in Arizona, as used at the Ravenhall Facility in Australia and Auckland South in New Zealand, saw meaningful improvements in key metrics. Ravenhall received $2 million in bonuses for reducing recidivism, and Auckland South cut recidivism rates by 36 percent for the general population. 

Performance-based contracts are the sensible next step for corrections reform. As shown in Ravenhall and Auckland South, private providers with the right incentives can actually lead to better outcomes than traditional publicly-run facilities, which face the same incentives as per diem private operators. A bold state like Arizona can innovate with performance-based policies and set the tone for the rest of the nation.

Jakob Dupuis is the Public Affairs Manager at Social Purpose Corrections.