When Privatization Works, and Why It Doesn’t Always – NYTimes.com
The book offers telling insight on a topic that has ebbed and flowed across the world over the last 30 years, as governments of all stripes have set out to privatize state-owned enterprises and outsource services — what does the private sector do better than government, and what does it do worse? Long dormant in the United States, the debate has acquired new urgency as governments from Washington to statehouses and city halls around the country consider privatizing everything from Medicare to the management of state parks as a possible solution to their budget woes. One of the authors’ chief insights is that every organization faces trade-offs — inherent conflicts between competing objectives. The challenge is to manage them. This is way more difficult than it sounds.
While in government hands, British Petroleum paid too little attention to profitability, constrained by its need to please elected officials who often cared more about keeping energy cheap and employment high. But in private hands, it may have cared about profits far too much, at the expense of other objectives. “BP veered from being a company that made sure nothing blew up to one focusing on cost-cutting at all costs,” Professor Fisman said.
The success or failure of an organization often depends on whether it can clearly identify its goals and align the interests of managers and employees to serve them. Yet whatever reward structure an organization picks can skew incentives in an undesirable way.
“The Org” tells us of the sociologist Peter Moskos, who joined the Baltimore police force to study police behavior. The police hierarchy demanded arrests, so police officers arrested people: 20,000 in one year in the Eastern District alone, out of a local population of 45,000. One officer set a record by locking up people for violating bicycle regulations. Unsurprisingly, perhaps, Baltimore’s murder rate continued to climb.