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A 'perverse incentive' is a term for 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. It is a term probably first coined by Edgar Allan Poe in his short story ''The Imp of the Perverse''.
★ Some social welfare programs only give money to people with no job. Some argue that this discourages people from working because they would lose welfare benefits if they became employed. According to these critics, this leads to a net increase in poverty. This effect is called the 'Welfare trap.' In some cases, this incentive is countered by gradually phasing out benefits (for example, reducing benefits by 50 cents for each dollar earned), thus preserving the incentive to seek even part-time work.
★ Paying the executives of corporations proportionately to the size of their corporation is intended to encourage them to grow their companies by growing the bottom line (and not their earnings per share). However, it may cause them to pursue mergers to grow their companies, to the detriment of their shareholders' interest.
★ Any system of performance-related pay for corporate executives can induce unacceptable risk-taking, unless there are penalties for poor performance.
★ 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] In some very rare cases, it may even encourage firemen to make false reports of fires they have fought, or start fires on their own.
★ 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.[2]
★ 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 used for law-enforcement then police may have a reason to postpone action against a known drug-dealer until there is more property to seize, with the result that more people buy the drugs.
★ No Child Left Behind Act-type laws require schools to show smooth improvement in their students' test scores. Thus, schools may benefit from having poorer performance one year in order to show 'improvement' the next. Alternatively, where tests are given near the end of high school, schools may benefit from not making efforts to discourage lower-achieving students from dropping out before these students are old enough to take the tests.
★ The federal Endangered Species Act in the U.S. 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 in practice this causes landowners to make their land unsuitable for the protected species, so the species will go elsewhere, and the government will leave them alone. This causes circumstances for species that are worse than if the ESA did not exist.[3]
★ 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, since the 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.
★ Banning the sale of various recreational drugs may make drug dealers more likely to sell to minors. When it is illegal to sell to minors but legal to sell to adults, drug dealers have an incentive to refuse to sell to children. When all sales are equally punished, selling to minors may be safer for the dealer.
★ Some insurance contracts or social entitlement regulations can create an opportunity to change behavior in an unforeseen way so as to take advantage of them in a perverse way (moral hazard, free rider).
★ In the Soviet Union, bread was mandated to be cheaper than the grain used to make bread. Thus, pig farmers fed bread rather than grain to their pigs.
★ Where libraries and similar institutions charge a fee for copying but not for printing, users may print multiple copies of a document — which could cost the institution more than free copying would.
★ To prevent police brutality, police in some areas are no longer issued nightsticks. However, this may encourage them to use their heavy metal flashlights as weapons instead, causing worse injuries.[4]
★ During the Vietnam War, the Central Intelligence Agency and South Vietnamese intelligence conducted a covert operation called the Phoenix Program, which was assigned to detain or kill Viet Cong sympathizers. South Vietnamese and American combatants were offered a reward for each enemy, dead or alive. This allegedly resulted in the killing of more innocent civilians than hostile fighters.
★ Digital Rights Management schemes are often used to discourage illegal piracy 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. Since pirated content usually does not contain DRM, user who do not want DRM restrictions on their content have a perverse incentive to pirate it. For example, if the publisher attempts to increase revenues by preventing ripping with DRM, it may be easier to pirate the ripped content than use a disc with DRM, therefore effectively reducing the publisher's revenues.
★ Management might stash away money in a slush fund, in case there isn't enough profit during the next quarter for management to make their bonuses. The incentive based management pay can thus perversely make the company less profitable.
★ Some jurisdictions, such as Ontario, have rent control regimes in place that control the rate of rent increases after a tenancy has commenced, but allow a landlord to negotiate whatever rent (s)he is able to collect from new tenants. Landlords in these jurisdictions have often been accused of trying to evict low-revenue tenants on frivolous grounds, although just cause eviction controls are often put into place to try and stop this practice. Landlords under just cause eviction control regimes have sometimes been accused of responding by deliberately or recklessly letting conditions deteriorate to the point that undesirable low-revenue tenants voluntarily move out. Gathering evidence to enforce laws against such actions is usually much more time consuming than preventing unlawful evictions.
★ 19th century palaeontologists traveling to China used to pay peasants for each fragment of dinosaur bone that they produced. They later discovered that peasants would dig up the bones and then smash into multiple pieces to maximise their payments.[5]
★ Birth control is intended to prevent unwanted births. Responsible people who are not morally disinclined are more apt to use it than irresponsible people when not in a position to support children; the net consequence being that a larger proportion of total births are children of irresponsible people.
★ Government rebates for low gas consumption vehicles encourage people to buy those vehicles. People who own low gas consumption vehicles find that the cost of driving their cars has gone down, since the cars require less gas, and hence they will want to drive their cars more often. The net results could potentially be an increase in total gas consumption.
★ Unintended consequence
★ Conflict of interest
★ Kludge
★ Moral hazard
★ Murphy's law
★ Perverse effects of vaccination
★ Unforeseen effects of species introduction
★ Unintended consequences
★ Tragedy of the commons
1. Department for Communities and Local Government (2002). "Fire". In ''Consultation on the Local Government Finance Formula Grant Distribution''. Retrieved November 10, 2006.
2. 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
3. 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
4. New LAPD Flashlight Avoids Use As Weapon, KNBC-TV News, Mar. 30, 2007
5. Bill Bryson, ''A Short History of Nearly Everything''
★ 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.
★ UPI story: Study: 3-strikes laws increase homicides
| Contents |
| Examples |
| See also |
| Notes and references |
| Other references |
Examples
★ Some social welfare programs only give money to people with no job. Some argue that this discourages people from working because they would lose welfare benefits if they became employed. According to these critics, this leads to a net increase in poverty. This effect is called the 'Welfare trap.' In some cases, this incentive is countered by gradually phasing out benefits (for example, reducing benefits by 50 cents for each dollar earned), thus preserving the incentive to seek even part-time work.
★ Paying the executives of corporations proportionately to the size of their corporation is intended to encourage them to grow their companies by growing the bottom line (and not their earnings per share). However, it may cause them to pursue mergers to grow their companies, to the detriment of their shareholders' interest.
★ Any system of performance-related pay for corporate executives can induce unacceptable risk-taking, unless there are penalties for poor performance.
★ 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] In some very rare cases, it may even encourage firemen to make false reports of fires they have fought, or start fires on their own.
★ 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.[2]
★ 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 used for law-enforcement then police may have a reason to postpone action against a known drug-dealer until there is more property to seize, with the result that more people buy the drugs.
★ No Child Left Behind Act-type laws require schools to show smooth improvement in their students' test scores. Thus, schools may benefit from having poorer performance one year in order to show 'improvement' the next. Alternatively, where tests are given near the end of high school, schools may benefit from not making efforts to discourage lower-achieving students from dropping out before these students are old enough to take the tests.
★ The federal Endangered Species Act in the U.S. 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 in practice this causes landowners to make their land unsuitable for the protected species, so the species will go elsewhere, and the government will leave them alone. This causes circumstances for species that are worse than if the ESA did not exist.[3]
★ 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, since the 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.
★ Banning the sale of various recreational drugs may make drug dealers more likely to sell to minors. When it is illegal to sell to minors but legal to sell to adults, drug dealers have an incentive to refuse to sell to children. When all sales are equally punished, selling to minors may be safer for the dealer.
★ Some insurance contracts or social entitlement regulations can create an opportunity to change behavior in an unforeseen way so as to take advantage of them in a perverse way (moral hazard, free rider).
★ In the Soviet Union, bread was mandated to be cheaper than the grain used to make bread. Thus, pig farmers fed bread rather than grain to their pigs.
★ Where libraries and similar institutions charge a fee for copying but not for printing, users may print multiple copies of a document — which could cost the institution more than free copying would.
★ To prevent police brutality, police in some areas are no longer issued nightsticks. However, this may encourage them to use their heavy metal flashlights as weapons instead, causing worse injuries.[4]
★ During the Vietnam War, the Central Intelligence Agency and South Vietnamese intelligence conducted a covert operation called the Phoenix Program, which was assigned to detain or kill Viet Cong sympathizers. South Vietnamese and American combatants were offered a reward for each enemy, dead or alive. This allegedly resulted in the killing of more innocent civilians than hostile fighters.
★ Digital Rights Management schemes are often used to discourage illegal piracy 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. Since pirated content usually does not contain DRM, user who do not want DRM restrictions on their content have a perverse incentive to pirate it. For example, if the publisher attempts to increase revenues by preventing ripping with DRM, it may be easier to pirate the ripped content than use a disc with DRM, therefore effectively reducing the publisher's revenues.
★ Management might stash away money in a slush fund, in case there isn't enough profit during the next quarter for management to make their bonuses. The incentive based management pay can thus perversely make the company less profitable.
★ Some jurisdictions, such as Ontario, have rent control regimes in place that control the rate of rent increases after a tenancy has commenced, but allow a landlord to negotiate whatever rent (s)he is able to collect from new tenants. Landlords in these jurisdictions have often been accused of trying to evict low-revenue tenants on frivolous grounds, although just cause eviction controls are often put into place to try and stop this practice. Landlords under just cause eviction control regimes have sometimes been accused of responding by deliberately or recklessly letting conditions deteriorate to the point that undesirable low-revenue tenants voluntarily move out. Gathering evidence to enforce laws against such actions is usually much more time consuming than preventing unlawful evictions.
★ 19th century palaeontologists traveling to China used to pay peasants for each fragment of dinosaur bone that they produced. They later discovered that peasants would dig up the bones and then smash into multiple pieces to maximise their payments.[5]
★ Birth control is intended to prevent unwanted births. Responsible people who are not morally disinclined are more apt to use it than irresponsible people when not in a position to support children; the net consequence being that a larger proportion of total births are children of irresponsible people.
★ Government rebates for low gas consumption vehicles encourage people to buy those vehicles. People who own low gas consumption vehicles find that the cost of driving their cars has gone down, since the cars require less gas, and hence they will want to drive their cars more often. The net results could potentially be an increase in total gas consumption.
See also
★ Unintended consequence
★ Conflict of interest
★ Kludge
★ Moral hazard
★ Murphy's law
★ Perverse effects of vaccination
★ Unforeseen effects of species introduction
★ Unintended consequences
★ Tragedy of the commons
Notes and references
1. Department for Communities and Local Government (2002). "Fire". In ''Consultation on the Local Government Finance Formula Grant Distribution''. Retrieved November 10, 2006.
2. 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
3. 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
4. New LAPD Flashlight Avoids Use As Weapon, KNBC-TV News, Mar. 30, 2007
5. Bill Bryson, ''A Short History of Nearly Everything''
Other 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.
★ UPI story: Study: 3-strikes laws increase homicides
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