Friday, September 20, 2013
Professor Epstein (pictured) recently joined the faculty at the DePaul University School of Law. Her article, Contract Theory and the Failures of Public-Private Contracting, has just been published in 34 Cardozo L. Rev. 2211 (2013).
Her article is all the more timely as, in the wake of this week’s tragic Navy shooting, government contracting failures are again in the news. The U.S. Department of Defense audit just released includes a scathing report confirming that the Navy’s efforts to reduce costs through contractors ended up not only weakening security but also increasing long-term costs.
She has provided a little summary below
In the Article, she discusses why certain types of government outsourcing contracts are systematically biased to cut cost at the expense of service quality. Approaching the problem through a law and economics lens, her theory is that particularly where there is a limited competitive market for services, tasks are difficult to specify and monitor, and the service is intended to benefit disenfranchised portions of the population, the contracting parties will often impose a negative externality on service recipients in the form of poor service that the contracting parties are not forced to internalize. Essentially, then, the cost of such contracts is higher than it would appear (if one figures in the negative externality, the added cost of the poor service). The Article suggests that because these contracts really reflect market failures, that a mandatory contract rule might be justified to protect non-parties to the contract who cannot adequately protect themselves. The mandatory rule would force the transacting parties to bear the cost of the negative externality.