Perverse incentive

From Wikipedia, the free encyclopedia
Jump to: navigation, search

A perverse incentive is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers. Perverse incentives are a type of unintended consequence.

Examples[edit]

  • In Hanoi, under French colonial rule, a program paying people a bounty for each rat tail handed in was intended to exterminate rats. Instead, it led to the farming of rats.[1]
  • Funding fire departments by the number of fire calls made is intended to reward the fire departments that do the most work. However, it may discourage them from fire-prevention activities, which reduce the number of fires.[2]
  • 19th century palaeontologists traveling to China used to pay peasants for each fragment of dinosaur bone (dinosaur fossils) that they produced. They later discovered that the peasants dug up the bones and then smashed them into many pieces, greatly reducing their scientific value, to maximise their payments.[3]
  • Paying medical professionals and reimbursing insured patients for treatment but not prevention encourages the ignoring of medical conditions until treatment is required.[4] Also, paying only for treatment effectively discourages prevention (which would reduce the demand for future treatments and would also improve quality of life for the patient). Payment for treatment also generates a perverse incentive for unnecessary treatments which could be harmful, for example in the form of side effects of drugs and surgery. These side effects themselves can then trigger a demand for further treatments.
  • Bangkok police used tartan armbands as a badge of shame for minor infractions, but they were treated as collectibles by offending officers forced to wear them. Since 2007, they have been using armbands with the cute Hello Kitty cartoon character to avoid the perverse incentive.[5]
  • The Endangered Species Act in the US imposes development restrictions on landowners who find endangered species on their property. While this policy is well intentioned and has some positive effects for wildlife, it also encourages preemptive habitat destruction (draining swamps or cutting down trees that might host valuable species) by landowners who fear losing the use of their land because of the presence of an endangered species.[6] In some cases, endangered species may even be deliberately killed (shooting, shoveling, and shutting up) to avoid discovery.
  • Providing company executives with bonuses for reporting higher earnings encouraged executives at the Federal National Mortgage Association and other large corporations to artificially inflate earnings statements and make decisions targeting short-term gains at the expense of long-term profitability.[7]
  • Opponents of digital rights management argue that it creates perverse incentives for users to use pirated software when they are unable to access games they have legally purchased. They also argue that the additional transactional costs of accessing games - through server activation, passwords, requirement for internet access - drive people to piracy.[8]
  • Before the Anatomy Act of 1832, executed criminals were the only legal source of bodies for hospitals to use for surgeon training. Due to high demand from chronic shortage of legal cadavers, "resurrection men" resorted to illegal means to obtain bodies, such as digging up corpses from graveyards or even murder. In 1828, William Burke and William Hare murdered 16 people and sold the bodies. Thomas Williams and John Bishop, part of a group of body snatchers known as the London Burkers, committed murder for the purpose of selling the victim's body in 1831.
  • Parkinson's Law is primarily based on perverse incentives. For example, an IT manager moves from industry to a bloated IT department in a local Council. He finds that 50 employees are doing work that he knows could be done by 5 employees. He cuts his staff down to 5 employees, thus saving ratepayers lots of money. He then applies for a senior IT management post at another Council and gets told he is not managing a big enough department. He starts building up his own department to 100 staff, even though he knows only 5 staff are needed. (Incidentally, this example is taken from a letter by an anonymous IT manager published in an IT magazine.)

See also[edit]

References[edit]

  1. ^ Michael G. Vann, "Of Rats, Rice, and Race: The Great Hanoi Rat Massacre, an Episode in French Colonial History," French Colonial History Society, May, 2003
  2. ^ Department for Communities and Local Government (2002). "Fire". In Consultation on the Local Government Finance Formula Grant Distribution. Retrieved November 10, 2006.
  3. ^ Bill Bryson, A Short History of Nearly Everything
  4. ^ James C. Robinson, Reinvention of Health Insurance in the Consumer Era (2004). In JAMA, April 21, 2004; 291: 1880 - 1886. Retrieved 2008-01-12
  5. ^ Myndans, Seth (2007-08-25). "Cute Kitty Is Pink Badge of Shame in Bangkok". The New York Times. Retrieved 2007-11-06. "It is the pink armband of shame for wayward police officers, as cute as it can be, with a Hello Kitty face and a pair of linked hearts." 
  6. ^ Stephen Dubner and Steven Levitt, consequences&st=cse&scp=1 Unintended Consequences, New York Times Magazine, 20 January 2008
  7. ^ Lucian Bebchuk and Jesse Fried, Executive Compensation at Fannie Mae, Harvard, 2 February 2005
  8. ^ "EA bans customers from playing own games". Boing Boing. Retrieved 2013-03-29. 

Further reading[edit]

  • Sloan, John III; Kovandzic, Tomislav V. & Vieraitis, Lynee M. (2002). "Unintended Consequences of Politically Popular Sentencing Policy: The Homicide-Promoting Effects of 'Three Strikes' in U.S. Cities (1980–1999)". Criminology & Public Policy 1 (3): 399–424. doi:10.1111/j.1745-9133.2002.tb00100.x.