The study examined the rationale and the emergence of privately managed prisons in the United States. The analyses measured the extent to which privately operated prisons solves the problem of crowded prisons and state’s ability to reduce expenditure without undermining inmate’s welfare and rights. The study considered the case of Texas prisons. Texas being a state with the second largest prison system in the U.S.A. was ideal for analysis. Recent growth in the size of Texas' prison system has been increasingly costly and beyond the capacity of Texas department of criminal justice. The paper analyzed the extent to which private contractors were more efficient and their ability to secure private funds to construct more prisons than state governments. The paper also tested the notion of privatized organization’s capacity to save taxpayers money by introducing new management techniques and flexible employment policies.