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Oliver Hart and the ‘Proper Scope of Government’

Hart’s seminal economic theory, ‘The Proper Scope of Government,” underpins much of the research into public-private partnerships in healthcare. Hart developed this touchstone framework jointly with Andrei Shleifer and Robert W. Vishny to better evaluate when a government should provide a service itself and when it should contract with a private provider for support and execution of services.

The model outlined in Hart, Shleifer, and Vishny’s original 1996 working paper is designed to help providers and contractors consider the costs and benefits of a proposed contractual service agreement. While this model was originally applied to the case of prison privatization, the framework has served as an invaluable tool for researchers in multiple sectors including health policy and provision.

Reflections and Updates to the Theory

In reflecting on ‘The Proper Scope of Government,’ there are things Hart would like to see more fully incorporated into the theory to enrich its real-world applicability. Chiefly among these is better accounting for contractual incompleteness or the reality that a contract cannot anticipate and outline every possible unforeseen event or area of ambiguity. However, modeling contractual incompleteness is notoriously difficult given the almost-limitless factors of variability.

Some of Hart’s recent work on guiding principles responds to this challenge. Rather than trying to predict every aspect of a contractual relationship within the framing and language of a standard contract model, Hart argues that mutually agreed-upon guiding principles —such as equity, loyalty, and honesty — can serve as a foundation for navigating inevitable areas of ambiguity and potential conflict that a contract does not specifically state or that the original theory does not fully account for.

These guiding principles also help preserve space for renegotiation and innovation, which are necessary in an era of rapid technological advances and explosion of measurable data. In this context, Hart cautions against the mentality of ‘more is more:’

“If you put more and more things into the contract and then something happens that wasn’t in the contract, the fact that you put so much more in may make it more difficult to negotiate about the thing that you didn’t put in.”

 Applying ‘The Proper Scope of Government’

Hart shared a prime example of his theory at work in health systems in a case study of the Vancouver Island Health Authority. Traditionally, family physicians would continue as the primary care provider for their patients even if a patient needed hospitalization. But a change of law in 2006 required all specialized in-hospital care be contracted to hospitalists with little to no crossover with care provided by family practice physicians.

The result was a rise in caseload and stress levels amongst hospital specialists and repeated failed negotiations of the standard contract. The addition of guiding principles to the contract, however, provided avenues where reasonable solutions and additional communications could happen beyond the limits of the formal contract.

This is just one case of innumerable where Hart’s work has helped inform and contextualize how policymakers consider relationships between the public and private spheres of healthcare. Responding to the praise and input from fellow economists presented in a tribute documentary to the impact of his framework, Hart remarked:

“I hadn't realized how many people have been influenced by this paper and how they've been using it in different contexts. I knew some of the applications, but there were others I didn't, and it’s been truly amazing to see that.”

Looking Toward the Future

The tradeoffs between public and private partnerships in healthcare systems across the world will continue to be a dynamic and evolving area of research that will rely on theories such as ‘The Proper Scope of Government’ for framing and application. Looking towards the future, Hart was hopeful but cautious about the vitality of the kind of theoretical tradition which allowed for the development of his original theory. He recognizes that specialties such as contract theory and contractual incompleteness are inherently “messy” and somewhat out of vogue with current trends in economics which tend to favor theories that are “impressive, clever, and non-obvious,” regardless of whether they address important questions.

As he iterated in his Nobel Prize lecture, the incomplete world of contracts nonetheless “underlies numerous significant phenomena, some of which have great policy relevance,” and therefore fully deserving of upcoming economists’ time and efforts.

Further Research into Public-Private Partnerships

The Asia Health Policy Program’s 2020-21 colloquium series focuses on the roles and impacts of public-private partnerships in healthcare and the tradeoffs in equity, accessibility, and cost that come with contracted agreements in health systems. All of the events from the colloquium series are available on our YouTube channel. Click the thumbnails below to start exploring.

Collaborative governance — that is, relationships involving both the private and public sectors in the pursuit of public value — is part of ongoing research by Karen Eggleston. Her forthcoming book, The Dragon, the Eagle, and the Private Sector (Cambridge University Press), co-authored with Harvard’s John D. Donahue and Richard J. Zeckhauser, examines the ways in which collaborative governance works across a wide range of policy arenas in China and the United States, with the goal of empowering public decisionmakers to more wisely engage the private sector. Join us for the book launch event, which will be held jointly with the Harvard Kennedy School on March 5 

 

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