ⓘ Perverse incentive


ⓘ Perverse incentive

A perverse incentive is an incentive that has an unintended and undesirable result which is contrary to the intentions of its designers. Perverse incentives are a type of negative unintended consequence. A classic example of a perverse incentive occurred when the British government offered a bounty for dead cobras with intent to decrease the wild cobra population. However, enterprising people began to breed cobras for the income. When the government became aware of this, the reward program was scrapped, causing the cobra breeders to set the now-worthless snakes free. As a result, the wild cobra population further increased. The term cobra effect was coined to describe a situation where an attempted solution to a problem actually makes the problem worse.


1. Examples

  • 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.
  • Before the Anatomy Act 1832, executed criminals were the only legal source of bodies for hospitals to use for surgeon training in the United Kingdom. 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 victims body in 1831.
  • Awarding carbon credits for destroying the greenhouse gas HFC-23 incentivized increased manufacture of the refrigerant HCFC-22 chlorodifluoromethane whose production included HFC-23 as a by-product. This increased production caused the price of the refrigerant to decrease significantly, incentivizing refrigeration companies to continue using it, despite the adverse environmental effects.
  • 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.
  • 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 20th-century paleontologist G. H. R. von Koenigswald used to pay Javanese locals for each fragment of hominin skull that they produced. He later discovered the people had been breaking up whole skulls into smaller pieces to maximise their payments.
  • The devolved government in Northern Ireland enabled business owners to make profits guaranteed for 20 years by simply using more and more renewable energy to heat their premises in their Renewable Heat Incentive scheme. The declared objectives of the scheme were to reduce energy usage and promote switching to green sources.
  • Under the US Medicare program, doctors are reimbursed at a higher rate if they administer more expensive medications to treat a condition. This creates an incentive for the physician to prescribe a more expensive drug when a less expensive one might do.
  • In building the first transcontinental railroad in the 1860s, the United States Congress agreed to pay the builders per mile of track laid. As a result, Thomas C. Durant of Union Pacific Railroad lengthened a section of the route forming a bow shape unnecessarily adding miles of track.
  • 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.
  • The Wells Fargo account fraud scandal resulted from incentives intended to increase the number of accounts sold, but overly ambitious quotas combined with the threat of career ruin if quotas were not met caused some employees to open large numbers of accounts without customer permission.
  • 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.
  • 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. Allegedly, up to 20.000 orphaned children were falsely certified as mentally ill so the government of the province of Quebec could get $2.25 per day, per patient.
  • Paying medical professionals and reimbursing insured patients for treatment but not prevention encourages medical conditions to be ignored 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.
  • Real estate brokers have an inherent conflict of interest with sellers they represent because their usual commission structures motivate them to sell quickly rather than at a higher price. However, a broker representing a buyer has a distinct disincentive to negotiate a lower price on behalf of their client, because they will simultaneously be negotiating their own commission lower.
  • 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 a 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 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, then this gives a powerful disincentive to take on such work.
  • Critique of professionalization views overzealous versions driven by perverse incentives essentially, a modern analogue of the negative aspects of guilds
  • of fiscal revenue and expenditure, as making them so would induce perverse incentives to subnational governments to reduce fiscal effort. Australia introduced
  • arguing that a government guarantee of full employment created perverse incentives for employees. As World War II drew to a close, most economists predicted
  • incentive to perform in order be promoted and win the prize. However, compensation systems that resemble prizes can also create perverse incentives
  • Organisations Disability Group. In July 2019 it called for an end to perverse commissioning practices that are negatively impacting productivity and
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  • users. There are perverse incentives in the WUC s economic model. The WUC earns money from selling water, so does not have an incentive to conserve the
  • Principal could disavow it. If not for imputation, there would be a perverse incentive to conduct business through Agents rather than personally. Consequently
  • this penalty, many are concerned that the employer mandate creates a perverse incentive for business to employ people part - time instead of full - time. Several

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