Public-Private Contracting and the Reciprocity Norm

When governments outsource work to private entities-running prisons and schools, administering state benefits, and the like-they tend to write extremely detailed contracts. The conventional thinking is that these private entities need to be constrained lest they act opportunistically. Therefore, governments write contracts that highly specify tasks, contain robust monitoring provisions, and financially reward task compliance. This detailed contracting approach, viewing agents as selfish, profit-driven, and looking for opportunities to shirk, finds support in both the agency cost and public law literatures.This Article challenges the prevailing approach. It argues that control- based contracts can be not only difficult and expensive to write and costly to monitor, but they can stifle intrinsic motivation and innovation. Such detailed contracts frequently fail in practice with serious negative implications for the public.Recent literature in behavioral economics suggests that the conventional approach is actually premised on a misunderstanding of human nature. Experiments on the positive reciprocity norm-meaning that people reward kind, actions-have shown that less complete contracts induce higher effort levels and, a, more cooperative principal-agent relationship than the traditional approach. This Article incorporates this behavioral, research and, studies of real world, behavior to present an interdisciplinary argument for why the traditional public-private contracting approach should be rethought, both in theory and, in practice.IntroductionAfter the Navy discharged Aaron Alexis, a petty officer third class with a checkered performance record, he found work with a military contractor.1 His job gave him access to sensitive military installations across the world.2 On September 16, 2013, he used that access to kill twelve people at the Navy Yard in Washington, D.C., less than two miles from the Capitol.3Edward Snowden, a high school drop-out turned computer whiz, parlayed a job as a security guard for the National Security Agency into information technology work at the Central Intelligence Agency.4 After a couple of years, he left the CIA to become a subcontractor for the NSA.5 In May 2013, Snowden intentionally disclosed classified details of government surveillance programs to the press, creating tensions between the United States and some of its closest allies.6 He was subsequently charged with various acts of espionage.7Alexis and Snowden have one surprising thing in common. They were both vetted by U.S. Investigative Services, Inc. ("USIS"), a private company the U.S. government contracted with to conduct background checks after the government had amassed an untenable backlog for top secret security clearances.8 By outsourcing to USIS in a $2.45 billion, five-year contract, the government hoped to harness the speed, efficiency, and innovation of the private sector. To incentivize such efficiency, USIS was entided to payment only when it completed investigations.9USIS succeeded in eliminating the backlog on security checks. But it did so in a way the government presumably did not intend.10 To meet revenue goals, particularly at month end, senior executives at USIS allegedly gave the directive to flush applications-simply approving them without review-so that the company could receive payment.* 11 In other words, USIS took shortcuts to accomplish so- called efficient results.12The USIS example is not an isolated one. Recent years have seen a government privatization frenzy fueled by faith that the private sector can outperform the government by reducing costs while improving service quality.13 But evidence is mounting that at least for certain types of services, governments are not seeing the predicted improvement in quality through outsourcing.14 Rather than reducing cost and improving service through innovation, private providers often reduce cost by cutting corners. …