Perverse incentive

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 consequences.

Examples

• 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.^[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]
• 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]
• Opponents of the Endangered Species Act in the US argue that it may encourage preemptive habitat destruction by landowners who fear losing the use of their land because of the presence of an endangered species,^[6] known as shooting, shoveling, and shutting up.
• Providing company executives with bonuses for reporting higher earnings encouraged executives at the Federal National Mortgage Association and other large corporations to artificially inflate earnings statements and make decisions targeting short term gains at the expense of long term profitability.^[7]
• Opponents of digital rights management argue that it creates perverse incentives for users to use pirated software when they are unable to access games they have legally purchased. They also argue that the additional transactional costs of accessing games - through server activation, passwords, requirement for internet access - drive people to piracy.^[8]

See also

• Cobra effect
• Conflict of interest
• Invasive species
• Moral hazard
• Social trap
• Superimposed schedules
• Tragedy of the commons
• Welfare trap

References

Further reading

• 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.