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 negative unintended consequence or cobra effect.

Examples

• 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.^[1]
• 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 Catholic Church could get $2.25 per day, per patient.^[2][3][4]
• 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.^[5]
• 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.^[6]
• Paying medical professionals and reimbursing insured patients for treatment but not prevention encourages the ignoring of medical conditions until treatment is required.^[7] 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.^[8]
• 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.^[9] 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.^[10]
• 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.
• 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.^[11]
• 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.^[12] 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.^[13][14]
• Awarding Carbon Credits for 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.^[15][16]
• Since Chinese law provides that someone who inflicts a debilitating injury on another, even negligently, must bear the costs of that person's care for the rest of their lives, while someone who recklessly causes the death of another is only responsible for the funeral expenses, Chinese drivers have been known to practice "hit-to-kill", running over a pedestrian several times after the initial accident to ensure their deaths.^[17] However, the well-known Urban Legend debunking site Snopes.com raises some serious doubts as to whether this is actually true.^[18]

See also

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

References

1. 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
2. Protesters in straitjackets demand inquiry of Duplessis Orphans era
3. Allegations of child abuse
4. Orphans sue Catholic orders over mistreatment
5. Department for Communities and Local Government (2002). "Fire". In Consultation on the Local Government Finance Formula Grant Distribution. Retrieved November 10, 2006.
6. Bill Bryson, A Short History of Nearly Everything
7. James C. Robinson, Reinvention of Health Insurance in the Consumer Era (2004). In JAMA, April 21, 2004; 291: 1880 - 1886. Retrieved 2008-01-12
8. 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.
9. Stephen Dubner and Steven Levitt, consequences&st=cse&scp=1 Unintended Consequences, New York Times Magazine, 20 January 2008
10. Bebchuk, L., & Fried, J. M. (2005) "Executive Compensation at Fannie Mae: A Case Study of Perverse Incentives, Nonperformance Pay, and Camouflage" Journal of Corporation Law, 30 (4): 807–822.
11. Mark Zwonitzer, writer, PBS American Experience documentary "Transcontinental Railroad" (2006) "Program Transcript . Transcontinental Railroad . WGBH American Experience"
12. "Gassing up the welfare trap machine", an Atlantic Institute for Market Studies webpage
13. Thompson, Derek (February 17, 2012) "The Entrepreneur State: Safety Nets for Startups, Capitalism for Corporations" The Atlantic
14. Livingston, Jay (November 10, 2011) "Start-Ups and Safety Nets" The Society Pages: Sociological Images
15. 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.
16. "Carbon credit scam slur on Indian firms". http://www.hindustantimes.com/. Retrieved 2015-07-02. External link in |website= (help)
17. Sant, Geoffrey (September 4, 2015). "Driven to Kill". Slate. Retrieved September 4, 2015.
18. "Chinese Wreckers". Retrieved October 11, 2015.

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.