Understanding the Effects of Government Procurement Methods on Prices: an Empirical Study of Inmate Telecommunications Services

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The project will collect data and use the data to test a model of how government procurement can affect the price of a service. The research team will examine why the rates that inmates pay for telecommunications are much higher than the cost of providing the service. The project will make three specific contributions. The first is to collect, organize, and publish information about the rates charged to inmates and the contracts negotiated between the private companies providing telecommunications services and the procuring government entities (e.g., a state-level Department of Corrections). The second is to analyze the information through the lens of economic theory to understand why rates are set at a high level. Among the factors that may contribute to elevated rates are a high willingness-to-pay for calls, limited competition among the providers of telecommunications services, and revenue-sharing agreements between providers and the procuring entities. Finally, the project will explore the efficacy of various policy remedies that have been proposed by interested nonprofit organizations. The results will help us understand how the specific rules used for government procurement affect procurement outcomes. The result could be new insights into how to improve procurement methods to meet important societal goals such as overall economic efficiency and consumer fairness.The project is an empirical study of inmate telecommunications services (ITS) in the United States. It is widely known that inmates pay very high rates, that the market for ITS is highly concentrated, and that the procuring government entity typically negotiates to obtain a portion of the revenues obtained from inmates. To support empirical inquiry, data will be collected on the procurement process, taking advantage of public information laws that make documentation available upon request in many states. A structural model of procurement will be developed based on the second-score auction framework of Asker and Cantillon (2008), and the parameters of the model will be estimated or calibrated using the data obtained from the data requests. With counterfactual simulations, the contributions of market power and revenue-sharing agreements to the rates charged to inmates will be quantified. Further, the efficacy of enhanced antitrust enforcement, contraction restrictions, and rate regulation will be explored.This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.