THE PRIVATE OPTION
OF POLICE
PROFESSORS ERWI N BLACKSTONE AND SI MON HAKI M ARE
PROFESSORS OF ECONOMI CS AND MEMBERS OF THE CENTER FOR
COMPETITIVE GOVERNMENT OF THE FOX SCHOOL OF BUSINESS
AND MANAGEMENT, TEMPLE UNI VERSI TY.
CONTACT:HAKIM@TEMPLE.EDU, 215-204-5037.
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CONTENTS
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The problem
Changing landscape of crime
The public good aspect of police
The structure of the private security industry
Increased share of private police results from:
• Public police shedding of private services
• Public good services contracted out
• New security needs are client oriented
• Social costs & benefits resulting from the increase of private
police
• Future trends
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THE PROBLEM
The economic downturn of the past several years has
devastated local economies and their local law
enforcement agencies. The nation’s law enforcement
agencies are confronting severe budget cuts and
unmanageable layoffs.
• Layoffs, furloughs, and unfilled jobs mean less public safety
• In 2011 nearly 12,000 police officers and sheriff’s deputies
were laid off.
• Approximately 30,000 law enforcement jobs are unfilled.
• An estimated 28,000 officers and deputies have faced
week-long furloughs in 2010.
• An estimated 53 percent of counties are working with fewer
staff today than just one year ago.
• 2011 produced the first national decline in law enforcement
officer positions in at least the last 25 years.
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SIGNIFICANCE OF PROBLEM
Budget cuts have a heavy impact
• Over one-third of the agencies that applied for 2011 COPS officer hiring
funding reported an operating budget drop of greater than 5 percent
between 2009 and 2011.
• Nearly a quarter of American cities surveyed have made cuts to public
safety budgets.
• Some agencies have stopped responding to all motor vehicle thefts,
burglar alarms, and non-injury motor vehicle accidents.
• Agencies have also reported decreases in investigations of property
crimes, fugitive tracking, a variety of white collar crimes, and even lowlevel narcotics cases.
• Many agencies have greatly reduced training opportunities for their
officers.
• Investments in technology and communications systems are being
slashed in many agencies facing budget reductions.
• http://www.cops.usdoj.gov/Default.asp?Item=2602
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CHANGING LANDSCAPE OF CRIME
• Public police agencies are primarily engaged in handling
property and violent crime (FBI part1crimes).
• From 1976 through 2008, property crime declined 75% on a per capita basis.
Violent crime decreased between 1981 through 2008 by 63% per capita.
• In 1977, state and local police officers numbered 574,000 or 2.657 per 1,000
population. In 2008, officers increased 29% from 1977 to 831,000 or 2.733 per
1,000. In other words, police employment seems unrelated to productivity as
reflected by their major mission.
• Studies showed that demographic and socioeconomic factors are responsible
for the reduction in these crimes.
• Between 2000 and 2009 economic crimes increased substantially.
Fraud complains grew 471%, and identity thefts increased 689%.
Other economic crimes include cyber, counterfeiting of branded
goods, and copyright abuse through the internet. Overall,
economic crime reported to the Federal Trade Commission (FTC)
grew 416%.
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FIGURE 1: CRIME RATES OVER TIME
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FIGURE 2: ECONOMIC CRIME COMPLAINTS
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INCREASED SHARE OF PRIVATE POLICE
IN TOTAL SECURITY
In the 1970s the ratio of public law enforcement officers to
private security officers was 1.4 to 1 while in 1990 the ratio
reversed to 3 private to 1 public and is still growing. Also
indicative of the US reliance on private security is the fact that
in the late 1990s the US had 582 private security guards per
100,000 people. The US private security rate was second in the
world to the 900 in South Africa, and much higher than the 432
in Canada and the160 in the entire EU. The corresponding
rates for public police were 321 in the US, 312 in South Africa,
260 in Canada, and 375 in the EU. Finally, spending on private
police has been 70 percent greater than that on public
police.
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PUBLIC GOOD ASPECT OF POLICE
• Activities that enhance overall security, cannot be priced, and if
provided to individuals provide significant positive externalities.
• Deterring, preventing, and detecting criminal behavior for all.
• Reducing the pool of criminals
• Supporting the punishment of unlawful behavior
• Providing a perception of security for all
• Enhancing homeland security: natural disasters & terrorism
• Traffic management
• The monopolistic nature of public police reduces incentive to
achieve the competitive marginal condition where officers are
employed to the point where a sworn officer wage is equal to the
value of his/her marginal productivity.
Government and/or police can self provide or
contract out to competitive bidding
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PRIVATE GOOD ASPECT OF POLICE
Services with few or no positive externalities provided
to individuals and which can be priced
• Response to false burglar alarms, unlocking cars,
escorting funerals, investigating traffic accidents,
animal control, and searching for missing persons
when no crime is suspected.
Police should shed such services to competitive
market. If public police wish to retain the services,
they must be priced at least to cover cost so they
are not subsidized by other public activities. other
public or private competitors should be allowed to
enter.
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PUBLIC AND PRIVATE POLICE GOALS
Public police : Maximizing social welfare (ill-defined)
• Deterring, preventing, detecting crimes, and support
punishment
• Improve perception of security with main emphasis on control
of violent crimes, and maintain good crime, arrests statistics.
• Like any organization maximize their own welfare: greater
budget, increased wages, and improved image
Private security: satisfying a private or public client.
• Emphasis on deterring and preventing crime
• No regard to detection like arrest, punishment, and externalities like
displacement.
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ATTRIBUTES OF PUBLIC POLICE
Government Monopoly:
• Focus on easy arrests for minor crimes (consumption of minor drugs, underage drinking)
and victimless crimes (prostitution, gambling)
• Concern mainly on events in own jurisdiction.
• Reluctant to change in activities including types of crime.
• Slow to adopt new technologies and management methods.
• Constrained by labor regulations in hiring and dismissing officers.
• Facing difficulties in hiring part time officers.
• Sworn officers of similar background, education, and training.
• Limited budgetary ability to hire experts in IT, accounting, and engineering education
• Facing bureaucratic and budgetary difficulties in acquiring needed technological
products like digital cameras when not pre-budgeted.
• Unable to reward by merit or provide incentives to excel . Constrained by the ability to
reward by promotion mostly at the higher limited ranks.
• Inefficient in use of labor to the level where the price equal to the value of marginal
product. Same is true for the use of capital. Officers often use at jobs that do not
warrant their pay.
• Able to engage volunteers.
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STRUCTURE OF PRIVATE POLICE
NAICS Code
5616 (Investigation & Security
Services)
561611 (Investigation Services)
561612 (Security Guards &
Patrol Services)
All Services
1997
2002
2007
Sales (in $000) (% change)
20,444,077
31,164,968 (52.4)
41,597,722 (33.5)
Establishments (% change)
21,494
23,068 (7.3)
24,998 (8.4)
Concentration Top 4
19.5
27.8
22.9
Concentration Top 8
29.0
33.0
29.1
Sales (in $000) (% change)
1,819,015
2,326,220 (27.9)
4,363,668 (87.6)
Establishments (% change)
5,077
4,955 (-2.4)
5,059 (2.1)
Concentration Top 4 (% change)
7.2
15.7
27.0
Concentration Top 8
(% change)
10.1
19.5
33.6
Sales (in $000) (% change)
9,132,633
14,787,704 (61.9)
19,405,389 (31.2)
Establishments (% change)
6,644
7,446 (12.1)
9,091 (22.1)
Concentration Top 4
28.3
32.7
30.6
Concentration Top 8
35.7
39.8
38.7
Sales (in $ billions)
3,235.8
4,347.2 (34.3%)
5,822.8 (33.4%)
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ANALYSIS OF CONTRACTED PRIVATE POLICE
• Low to moderate concentration for both guard and investigation
services
• Concentration overtime remain highly competitive however
concentration of investigation services rose more than guard
services.
• Investigation services are growing more rapidly than guard services.
• Entry barriers for both investigation and guard services are modest.
• Companies can easily establish their own proprietary services
creating greater competition.
• Buyers of services are knowledgeable.
• Buyers are sensitive to prices given all possible alternatives.
• Except in very specialized investigations, modest economies of scale.
• Economies of scope could exist. Example, response to alarms,
vacation services.
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IMPLICATIONS OF THE STRUCTURE OF THE
CONTRACTED PRIVATE POLICE
• Prices are approaching normal profits. Prices for guard and
patrol services have risen less than cost and less than the
overall price index for all services between 2004 and 2008.
• Security companies lose business based on prices.
• Pressure to adopt technology
• Market shares are not rigid.
• Limited mergers in industry: absence of economies of scale,
and companies valued at their replacement cost.
Companies are valued at their asset value with no
monopolistic profits to capture.
• Security companies need to tailor services to clients demands.
• Leading security companies create product differentiation to
capture modest monopolistic profits. Example,
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DIFFERENCES BETWEEN PUBLIC AND
PRIVATE POLICE
• Efficiency: Private security companies employ workers only if their
marginal contribution to revenues is larger than their cost (Up to:
Cw =MPw X Px). Public police often employ officers below their
value of MP (Cw>MPw x Px). Cw= Cost of an officer;
MPw=marginal production of an officer; and Px= value of
security.
• Police employ workers of similar education, and training with
small variation among ranks and duties. Private police have
much greater variation from high schools grades to forensic
accountants and IT experts with graduate degrees. Differences
stem from government civil service regulations to private market
pay that related to productivity.
• Police provide a service with little changes over time. Private
police tailor the service more to client’s requirements and
changing market demands. Private security moved from basic
guarding and investigation to sophisticated services like cyber,
identity theft, counterfeiting goods, guarding nuclear and
chemical facilities. Growing demand is evident for universities
and hospitals.
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DIFFERENCES BETWEEN PUBLIC AND
PRIVATE POLICE (CONTINUED)
• Public police who are constrained by budgets, bureaucratic procedures,
and unaffected by changing market demands are slow to adopt
technology. Private police are much faster to adopt technology when
profitable. Cameras, license plate readers, data management (multiple
silos, Comp Stat).
• Public police wages are 35% higher than private police and the
differences remain over time (see Figure 3).
• Public police are more restricted in awarding/penalizing officers. Private
police have more flexibility.
• Public police are slow to adopt managerial innovations copying after
some time from the private sector, and private police. The private sector
has always closely evaluated managers while Comp Stat was first adopted
in NYC in the late 1990’s.
• Public police were slow to adopt Community Policing which is solving
security problems to prevent crime. Private police from their inception
have engaged in Community Policing. When many cars are stolen in a
neighborhood, an officer meets with the residents to learn and advise the
residents how to prevent it.
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Figure 3: Annual Wages of Public Police,
Private Police, and Overall Employees
57,000
52,000
Annual Wages
47,000
Private Police
42,000
Public Police
37,000
average national wage
32,000
27,000
22,000
17,000
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Year
SOURCE: BLS NATIONAL OCCUPATIONAL EMPLOYMENT AND WAGE ESTIMATES FOR 1997 THROUGH 2007.
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DIFFERENCES BETWEEN PUBLIC AND
PRIVATE POLICE (CONTINUED 2)
• Public police hiring is little affected by market conditions, and actually
behaves anti-cyclical. Private police employment is directly related to
MARKET conditions as expressed by GDP (see Figure 4).
• Public police deal mostly with “traditional” crimes but have neglected
the growing economic crimes. The reasons are:
1. The rigidity of monopolies in general and bureaucratic/regulated
monopolies in particular. In addition, civil service regulations do
not allow hiring of highly paid professionals like forensic
accountants, IT professionals, and other highly skilled
professionals.
2. Economic crimes often extend beyond specific jurisdiction and thus
local police departments lack interest in addressing these crimes.
3. Businesses often are concerned with negative publicity and
possible exposure of irregularities and thus prefer the discretion of
private police.
4. Economic crimes do not generate the same positive publicity and
public approval that solving violent crime provides.
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FIGURE 4: ANNUAL PERCENTAGE CHANGE IN THE
NUMBER OF PUBLIC AND PRIVATE POLICE VERSUS
NOMINAL GDP
•
Source：BLS National Occupational Employment and wage estimates for 1997 through 2008
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DIFFERENCES BETWEEN PUBLIC AND
PRIVATE POLICE (CONTINUED 3)
• Private police have filled the void addressing economic crime
because:
1. Public police have neglected such crimes.
2. Businesses suffer of such crimes and have a strong reason in
curbing these crimes.
3. Incentives exist to create PPP to solve expanding economic
crimes. Private firms investigate, gather evidence, and
engage the district attorney and/or the police to make the
arrest and prosecute.
4.Often it is more expensive for companies to use public
police then to address the problem using private police.
For example, when charges are made against an
employee for embezzlement officers of the company may
be required to appear in court numerous times which could
be very costly. Private investigation could simply lead to
dismissal of the employee.
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DIFFERENCES BETWEEN PUBLIC AND
PRIVATE POLICE (CONTINUED 4)
• Public police have difficulties in hiring part time
officers or accommodating peak time demand.
They cannot accommodate varying demand
conditions without incurring high overtime costs.
Private police has easy time adjusting to changing
demands.
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EQUITY CONSIDERATIONS
• Claim: The wealthy enjoy better protection for which they
pay. The poor remain with lower level of security.
• Response: The wealthy enjoy more of any goods and services
for which they pay. In fact, enhanced private police in
wealthy neighborhoods and business districts frees up public
police to focus on other areas with high crime. In SLC, private
response to burglar alarms reduced response time to all high
priority from 5 to 3 minutes.
• Claim: Greater security in wealthy neighborhoods and
commercial districts displaces crime to areas unprotected by
private security.
• Response: Empirical studies do not support spatial crime
displacement.
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BENEFITS OF PUBLIC POLICE
• Public perception is that public police are trustworthy more
than multiple private security companies.
• Public police officers are better selected, educated,
trained, and experienced up to their value of marginal
product than private security officers. However, when
Pa>VMPa (=Ps X MPa) then it is inefficient to use public
police.
• Unlike private police, public police better addresses social
welfare by apprehending and punishing criminals unlike
private police concentration in deterring and preventing
crime for their client.
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BENEFITS OF PRIVATE POLICE
• All the benefits that characterize highly competitive
industry: lower production costs, prices close to costs, highly
innovative, companies always search for niche markets,
flexibility in meeting client demands, flexibility in hiring/firing
and use of part time workers.
• Private police have more flexibility in hiring and pay market
wages according to productivity. This allows them to hire
both low skilled and highly skilled workers which results in
greater differentiation in wages compared with public
police where only rank and longevity differentiate wages.
• Private police are more accountable to their clients while
public police do not need to compete nor satisfy particular
clients.
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RESULTS: LOW LEVEL SECURITY
• Concentration is moderate and increasing
modestly (50%). Like movie production &
distribution, less than soft drinks, and candy.
• Low barriers to entry. Relies mainly on unskilled
labor, low initial investment, no regulatory barriers
(training requirements are modest)
• Companies can and do provide their own security
• Homogeneous service
• Knowledgeable buyers
• Individual negotiations on contracts encourages
competitive pricing.
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RESULTS: HIGH LEVEL SECURITY
• New types of economic crimes: identity theft, cyber fraud,
malicious (viruses) internet crimes, counterfeiting goods, and
employee fraud.
• Police do not have the requisite skills to deal with them; they
require much time and expenses, are not jurisdictionally
bounded, and lack desired press publicity.
• Police refrain from dealing with crimes that adversely affect
profitability of firms unless directed by the district attorney.
• Businesses wish to avoid publicity of crime targeted at them.
• As a result, Economic crimes are handled by accounting,
engineering, law firms, and newly created highly professional
security companies.
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FUTURE OF PRIVATE POLICING
• Private police will expand above and below the standardized
service provided by public police.
• From below, private police will expand in guarding activities
and especially in the growing industries like universities,
hospitals, chemical and other critical infrastructures. Guard
wages and prices of services are unlikely to rise much
because of competitive low skilled labor market and the
industry.
• Private police will expand by blending into non-security
services enjoying economies of scope. For example, alarm
response, patrol and vacation services.
• From above, private police will provide high quality IT and
financial related services that require highly professional
workers.
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FUTURE OF PRIVATE POLICING
• Tight budgets will encourage public police to shed non-public
services and contract out quantifiable public services. For
example, guarding prisoners, courts and other government
buildings, crime labs, guarding public transit. This will expand
demand for private security. The highly competitive private
security industry will ensure competitive pricing.
• Hospitals, universities, FedEx, Longwood Security formed sworn
officer services in order to provide greater arrest and
investigation authority. This is, however, a limited trend.
• Competitiveness of the industry will ensure that security firms will
tap every niche market.
• Competition forces firms to employ technology intensively in
order to deliver service cheaply, effectively, and reduce number
of guards. Monopolistic public police have less incentive to
introduce technology.
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RECOMMENDATIONS
• Industry: Establish expertise in a particular industry or security focus.
Examples, Akal guarding military installations, Wackenhut securing
nuclear facilities, Securitas-universities, Allied/Barton- shopping
centers.
• Government: The highly competitive nature of the industry makes
even the existing loose background and training requirements
unimportant. Additional regulation is unnecessary. Exception may
be for weapon training because of externalities.
• Expansion of highly competitive private security is a socially desired
trend and does not require cities to regulate. Free markets provide
quality control, and technological and managerial innovations.
• Promote Public Private Partnerships like in a case of response to
burglar alarms, counterfeit goods, and identity thefts.
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