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Perverse incentive

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A perverse incentive is an incentive that has an unintended and undesirable effect, that is against the interest of the incentive makers. Perverse incentives by definition produce negative unintended consequences.

Examples

  • 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.[1]
  • The U.S. Endangered Species Act imposes land-use restrictions without compensation on people who have endangered or threatened species on their property. The intention is to protect at-risk species, but (according to the National Center for Public Policy Research) in practice this may cause landowners to make their land unsuitable for the protected species, so that the species will go elsewhere and the government will leave them alone.[2]
  • In Hanoi, under French colonial rule, a program paying people a bounty for each rat pelt handed in was intended to exterminate rats. Instead it led to the farming of rats.[3]
  • 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 peasants dug up the bones and then smashed them into multiple pieces to maximise their payments.[4]
  • Paying architects and engineers according to what is spent on a project leads to excessively costly projects.[5]
  • Paying medical professionals and reimbursing insured patients for treatment but not for prevention.[6]
  • Paying the executives of corporations proportionately to the size of their corporation is intended to encourage them to grow their companies. However, it may cause them to pursue mergers to enlarge their companies, to the detriment of their shareholders' interest.
  • The No Child Left Behind Act requires schools to show improvement in student test scores. Schools may respond by encouraging lower-achieving students to drop out before they take the tests,[7] by encouraging teachers to focus instruction on tested items or test-taking skills (i.e., "teaching to the test" instead of considering other forms of instruction or material that would have otherwise lead to increased student achievement),[8] or by simply lowering the standards in order to increase the number of students meeting them.[9]
  • Where libraries, universities, and similar institutions charge a higher fee for copying than for printing, users may print multiple copies of a document, which could cost the institution more than free copying would.
  • Digital rights management schemes are often used to discourage duplication of digital media by preventing copying of content, which also has the effect of reducing its utility to paying customers who want to play their purchased material on multiple machines, or make backups. The reduced functionality leads to the situation where pirates have a better product, and pirated copies may be preferred over genuine ones.
  • Setting the same minimum punishment for crimes of different severity may increase the incidence of the most serious crimes. For example, the practice of executing thieves may lead to an increase in murders, because a thief has an incentive to kill any witnesses to avoid being convicted—he will not be any the worse off if caught. This is the root of the saying "Might as well be hanged for a sheep as for a lamb". See also Coker v. Georgia.
  • Asset forfeiture laws are intended to reduce use of illegal drugs by preventing drug dealers from benefiting from their crimes and thereby making drug dealing less attractive. If the forfeited property (or proceeds from selling it) is to be used for law enforcement, police may have a reason to postpone action against a known drug dealer until there is more property to seize.
  • Minimum wage laws may prevent businesses from hiring workers with desirable skills that simply aren't worth at least minimum wage to have performed, therefore tending to increase unemployment rather than reducing it.

See also

Notes

  1. ^ Department for Communities and Local Government (2002). "Fire". In Consultation on the Local Government Finance Formula Grant Distribution. Retrieved November 10, 2006.
  2. ^ David A. Ridenour, "TESRA Endangered Species Act Reform Proposal Would Do More Harm Than Good," National Center for Public Policy Research, August, 2005 at http://www.nationalcenter.org/NPA531TESRA.html
  3. ^ 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
  4. ^ Bill Bryson, A Short History of Nearly Everything
  5. ^ Amory Lovins Questions Design and Resource Efficiency(2002). "Part 2" in Energy Strategies Special Report, buildings.com. Retrieved 2008-01-12
  6. ^ James C. Robinson, Reinvention of Health Insurance in the Consumer Era (2004). "Part 2". In JAMA, April 21, 2004; 291: 1880 - 1886. Retrieved 2008-01-12
  7. ^ Opinion: High-stakes testing
  8. ^ Gatto, John Taylor "Against School" Harper's Magazine, September 2003
  9. ^ [1]

References

  • John Sloan III, Tomislav V. Kovandzic and Lynee M. Vieraitis. Unintended Consequences of Politically Popular Sentencing Policy: The Homicide-Promoting Effects of 'Three Strikes' in U.S. Cities (1980-1999). Criminology & Public Policy, Vol 1, Issue 3, July 2002.
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