Private Security Firms and the Influence of Corporate Structure on Conflict Outcomes: Evidence from the Second Iraq – US War

Abstract

Does the corporate structure of private security firms (PSFs) influence conflict outcomes? Employers’ inclusion of PSFs in conflicts generates a dilemma for government employers as the former are profit-maximizing agents contracted to provide services outside established military structures. Contracts provide the legal structure to govern the provision of services. But contracts between PSFs and state employers are incomplete, particularly in conflict zones where considerable unforeseen contingencies exist. One approach to mitigate incomplete contracts is to identify information about the PSFs. We expect that the severity of the dilemma varies across different types of PSFs’ corporate structures. PSFs are either publicly traded or individually owned firms — firms that have non-public ownership structures. Corporate structure of the firm influences information availability. Increased information reduces oversight and management costs for employers of PSFs which, in turn, is argued to improve firm effectiveness. Satisfying demand for security services requires utilizing both publicly traded and individually owned firms. Expectations are tested utilizing both U.S. and non-U.S. headquartered private security firms operating in Iraq from March 2003 to December 2007. Based on the U.S. objective of establishing law and order, conflict outcome is measured using insurgent attacks and civilian casualties. Publicly traded firms are associated with reductions in violence, while individually owned firms are not. My findings have important theoretical and policy implications for both PSFs and their employers.