Prisons involve a large investment in specialized physical assets that would incur high transaction and adjustment costs if used for purposes other than incarceration, and thus, asset specificity is very high. Given the vulnerability of incarcerated individuals who have no option of legal exit and often little opportunity for voice (Hirschman, 1970), probity hazards are very high. The franchising out of prison operations is a governance structure alternative. However, the severe quality shading that can occur in such a “market” (lacking in exit or voice) are highly problematic (Hart, Shleifer, & Vishny, 1997; Williamson, 1999).

A market logic is also highly problematic in the case of foreign affairs, where there is high asset specificity and high probity hazards. As with prisons, public bureaucracy is regarded as comparatively efficient in mitigating probity hazards, where probity refers “to the loyalty and rectitude with which the foreign affairs transaction is discharged” (Williamson, 1999: 322; see Selznick, 1957). Considering interactions between the country president and the foreign affairs agency, Williamson (1999) primarily focuses on the problem of when the foreign affairs agency is non-compliant to the president. However, it is noted also that “a trade-off arises when the president’s near-term political interests and the longer-term mission interests of the state collide” (1999: 323). For example, a president owning hotels around the world should be deeply worrisome. Williamson (1999: 325) then notes: “The ideal type bureaucracy described by Max Weber (and now widely scorned) actually meets many of the needs of foreign affairs: jurisdictional ordering by official rules and regulations; clearly established hierarchical authority and appeal through administrative due process, the separation of business assets from private wealth; deep knowledge of procedure; and a vocational commitment to include training and loyalty to the office (Weber, 1946: 956-959). The high-powered incentives provided by a market logic are absent because such incentives” place the fidelity of the system at risk” (Williamson, 1999: 325). While creating inefficiencies, the public bureaucracy promotes probity in terms of purpose, responsiveness, and communication.

Williamson (1999: 338) states that: “Assuming that probity really is important, the entire economics of organization has been remiss.” In current times, I submit that any serious attempt to address societal challenges would be remiss if probity hazards were neglected. Imagine, for example, a corrupt government that exhibits self-dealing that then promotes mass incarceration to fill the facilities of private prisons and detention centers, creating a double probity hazard. In such environments, public-private partnerships may lead to the worst of all possible worlds with a profit-maximizing private prison monitored by a corrupt government. How one formulates an effective adaptive response to challenges involving simultaneous market, hybrid, and government failures is the puzzle posed here.