Perverse incentive

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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. Similarly, if the fine or other penalty for committing environmental damage is perceived as less burdensome than the cost of preventing the damage in the first place, an individual or company may not place safeguards in place and simply pay the penalty if the damage occurs.
  • Providing company executives with bonuses for reporting higher earnings encouraged executives at Fannie Mae and other large corporations to inflate earnings statements artificially and make decisions targeting short-term gains at the expense of long-term profitability.[7]
  • Digital rights management has been shown to create perverse incentives for users to use pirated software:[8] legally purchased software products have had necessary difficulties (e.g. product activation methods, user identification methods, continuing internet access) which their pirated counterparts have generally been without[9][10] and there have been incidents, such as erroneous bans,[11] that haven't affected those using pirated software.
  • 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.
  • The "welfare trap" of state welfare can be regarded as a [[perverse incentive], where the withdrawal of means tested benefits that comes with entering low-paid work causes there to be no significant increase in total income, giving no incentive to take such work.[12]
  • Eliminating social safety nets can discourage free market entrepreneurs by increasing the risk of business failure from a temporary setback to financial ruin.[13][14]

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. ^ Justin Mann, "UK study claims DRM encourages piracy", TechSpot, 2009-5-28
  9. ^ Nate Anderson, "Landmark study: DRM truly does make pirates out of us all", Ars Technica, 2009-5-28
  10. ^ Julio Franco, "Why even pay for software? A declaration against poorly implemented DRM", TechSpot, 2009-2-6
  11. ^ Jose Vilches, "EA addresses Spore DRM concerns", TechSpot, 2008-9-17
  12. ^ "Gassing up the welfare trap machine", an Atlantic Institute for Market Studies webpage
  13. ^ Thompson, Derek (February 17, 2012) "The Entrepreneur State: Safety Nets for Startups, Capitalism for Corporations" The Atlantic
  14. ^ Livingston, Jay (November 10, 2011) "Start-Ups and Safety Nets" The Society Pages: Sociological Images

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.