From Wikipedia, the free encyclopedia
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.
- 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.
- The Duplessis Orphans: Between 1945 and 1960, the federal Canadian government paid 70 cents a day per orphan to orphanages, and Psychiatric hospitals received $2.25 per day, per patient. Up to 20,000 orphaned children were falsely certified as mentally ill so the Catholic Church could get $2.25 per day, per patient.
- 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.
- 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.
- Paying medical professionals and reimbursing insured patients for treatment but not prevention encourages the ignoring of medical conditions until treatment is required. 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.
- 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. In some cases, endangered species may even be deliberately killed 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.
- Digital rights management has been shown to create perverse incentives for users to use pirated software. Legally purchased software products include sometimes cumbersome restrictions (e.g. product activation methods, user identification methods, requirements for continuing Internet access or content locked to one device) which are not present in pirated versions where hackers have circumvented the need for them. There have been incidents, such as erroneous bans,[not in citation given] that have not affected users of pirated software. Similarly, attempts by satellite television providers to lock subscribers into using proprietary package receivers unable to subscribe to other services affect the paying client but not pirate decryption viewers.
- Media content DRM has imposed limitations on all manner of formats and required use of cumbersome or buggy proprietary file management software. This often artificially limits the user's ability to use a purchased device or content with existing hardware in non-infringing ways. For example, early Sony Walkman MP3 players were supplied with a track store and file management software package that stalled, crashed, or took hours to complete simple operations on older computers - despite the very same computers' full ability to play the very same files without issue and transfer them to the Walkman device quickly. This required circumventing Sony software, limiting legitimate users with viable and proven-compatible computers from accessing Sony's track store, and forcing them to obtain music files in other ways. Other Sony DRM fiascos included the Playstation 3's Linux capabilities - deactivated/dropped via forced update on using newer PS3 discs or accessing PSN, Sony's integrated one-stop online hub for PS3 content, multiplayer, and other services - ostensibly, to prevent DRM circumventing software executed through linux mode. However, anyone wishing to continue using linux (an advertised feature until it was cut from later units) would thus be locked out from using any legitimate new PS3 software, and only be able to use pirated versions thereof. Arguably, both providing linux, capable of installing third-party software to access other content vendors, running non-Sony non-PS3-specific computer games, and using other media player software that supported file formats not included in the Sony audio and video players, as well as further on uninstalling said provision by force, were each perverse incentives to use other routes of acquiring media content (losing potential business for Sony and encouraging piracy by first making circumvention more convenient and more powerful, and then blocking legitimate access to users unwilling to forfeit an advertised feature they had paid for).
- 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" occurs when money earned through part-time or minimum wage employment result in a reduction in state benefits which is greater than that amount. This creates a barrier to low-income workers re-entering the workforce. Underlying factors include full tax exemption for public assistance while employment income is taxed, a pattern of welfare paying more per dependent child (while employers are prohibited from discriminating in this manner, and their workers often must purchase daycare), or loss of welfare eligibility for the working poor ending other means-tested benefits (public medical, dental or prescription drug plans, subsidised housing, legal aid) which are expensive to replace at full market rates. If the withdrawal of means tested benefits that comes with entering low-paid work causes there to be no significant increase in total income or even a net loss, this gives a powerful disincentive to take such work.
- Eliminating social safety nets can discourage free market entrepreneurs by increasing the risk that business failure from a temporary setback will lead to financial ruin.
- Awarding Carbon Credits for the destroying the greenhouse gas HFC-23 incentivized increased manufacture of the coolant HCFC-22 (also known as chlorodifuoromethane) whose production included HFC-23 as a by-product. This increased production caused the price of the coolant to decrease significantly, incentivizing refrigeration companies to continue using it, despite the adverse environmental effects.
- Cobra effect
- Conflict of interest
- Invasive species
- Moral hazard
- Perverse subsidies
- Social trap
- Superimposed schedules
- Tragedy of the commons
- Welfare trap
- 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
- Protesters in straightjackets demand inquiry of Duplessis Orphans era
- Allegations of child abuse
- Orphans sue Catholic orders over mistreatment
- Department for Communities and Local Government (2002). "Fire". In Consultation on the Local Government Finance Formula Grant Distribution. Retrieved November 10, 2006.
- Bill Bryson, A Short History of Nearly Everything
- James C. Robinson, Reinvention of Health Insurance in the Consumer Era (2004). In JAMA, April 21, 2004; 291: 1880 - 1886. Retrieved 2008-01-12
- 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.
- Stephen Dubner and Steven Levitt, consequences&st=cse&scp=1 Unintended Consequences, New York Times Magazine, 20 January 2008
- Lucian Bebchuk and Jesse Fried, Executive Compensation at Fannie Mae, Harvard, 2 February 2005
- Justin Mann, "UK study claims DRM encourages piracy", TechSpot, 2009-5-28
- Nate Anderson, "Landmark study: DRM truly does make pirates out of us all", Ars Technica, 2009-5-28
- Julio Franco, "Why even pay for software? A declaration against poorly implemented DRM", TechSpot, 2009-2-6
- Jose Vilches, "EA addresses Spore DRM concerns", TechSpot, 2008-9-17
- "Gassing up the welfare trap machine", an Atlantic Institute for Market Studies webpage
- Thompson, Derek (February 17, 2012) "The Entrepreneur State: Safety Nets for Startups, Capitalism for Corporations" The Atlantic
- Livingston, Jay (November 10, 2011) "Start-Ups and Safety Nets" The Society Pages: Sociological Images
- Rosenthal, Elisabeth; Lehren, Andrew W. (2012-08-08). "Incentive to Slow Climate Change Drives Output of Harmful Gases". The New York Times. ISSN 0362-4331. Retrieved 2015-07-02.
- "Carbon credit scam slur on Indian firms". http://www.hindustantimes.com/. Retrieved 2015-07-02.
- 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.