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This paper aims to discuss the impacts of private companies on public service provision by analyzing the outsourcing of prison services in Paraná State, Brazil. By using a principal-agent approach, the present work compares privately operated prisons with traditional prisons wholly managed by the state 2001 to 2006. It evaluates whether or not outsourcing impacted the performance indicators of prisons and, consequently, analyzes the effectiveness of outsourcing. In accordance with the theoretical references, the strategic decisions of governments when involving the private sector in the prison system would lead to reduced costs in detriment of the quality of services. However, the results show that outsourced prisons did not only show cost savings but also increased quality standards in comparison with traditional public prisons. The study concludes by discussing the organizational mechanisms that might generate such results. [ABSTRACT FROM AUTHOR]