Perverse incentive

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A perverse incentive is a term for an incentive that has the opposite effect of that intended. Perverse incentives by definition produce unintended consequences.

For example:

  • 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.
  • 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.
  • In India, 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.
  • In computer security, users are encouraged to use passwords which are difficult for an attacker to guess. However, assigned passwords which are too complicated may be hard to remember, leading users to write them down rather than memorizing them — and many attackers can find the written passwords more easily than guessing the user-selected weak ones. (Today, some security researchers suggest that it's actually better to use complicated passwords but write them down, as long as they're written down only in a safe place such as the user's wallet, rather than on the desk.)
  • "Three-strikes laws", under which a third felony conviction yields life imprisonment, are intended to deter repeat offenders. However, they may encourage repeat criminals to kill witnesses — since the sentence for murder is no worse than the sentence for a lesser third offense.
  • An airline may promote a marketing campaign with one of their local newspaper partners, giving new subscribers 500 frequent flyer miles on the airline. The goal is to broaden newspaper circulation (and raise the attractiveness of the newspaper to advertisers). A few enterprising people work out that it could actually be cheaper to subscribe to multiple newspapers-- hundreds of subscriptions to the same address-- than buying a ticket to a far off destination. This massive subscription effort simply costs the newspaper (the entity who pays the airline for mileage awards), yet new readership has not increased at all.
  • Banning the sale of various recreational drugs may make drug dealers more likely to sell to children. When it is illegal to sell to children 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 children may be safer for the dealer.
  • Some insurance contracts or social entitlement regulations can give 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.
  • The United States and The Netherlands have a tax deduction for mortgage interest on one's primary residence. While this was intended to promote home ownership among the middle and lower class, some wealthier people with a secure income obtain mortgages with lower down payment, longer term, or both than they would otherwise choose and invest the amount saved at the time of purchase. The government effectively subsidizes the investments.
  • To prevent police brutality, police in some areas are no longer issued nightsticks. However, this may encourage them to use their metal flashlights instead, causing worse injuries.
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References

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