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 negative unintended consequences.

Contents 1 Examples 2 See also 3 Notes and references 3.1 Other references

[edit] 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 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.^{[citation needed]}

• In computer security, users are encouraged to use passwords that are difficult for an attacker to guess. However, assigned passwords that 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. Written passwords can also not be compromised without line-of-sight: i.e., an attacker from a remote location cannot find the written password unless it is visible e.g. through a window.)

• Setting the same minimum punishment for crimes of different severity may increase the incidence of the most serious crimes. For example, the practise 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 hung for a sheep as for a lamb". See also Coker v. Georgia.

• 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 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.^{[citation needed]}

• 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 classes, some wealthy people with a secure income obtain mortgages with a lower down payment, a 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 heavy metal flashlights instead, causing worse injuries. Police-equipment catalogues often advertise Mag-Lite and similar flashlights with thick aluminum-alloy shells as potential weapons^{[citation needed]}.

• 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. Pirated content usually does not contain DRM, so people who do not want DRM in 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 buy a disc with DRM, therefore effectively reducing the publisher's revenues.

• 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.

• 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.^{[citation needed]}

• 19th century palaeontologists travelling 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.^[2]

[edit] See also

• Side-effect
• Kludge
• Moral hazard
• Murphy's law
• Perverse effects of vaccination
• Unforeseen effects of species introduction
• Unintended consequences
• Tragedy of the commons

[edit] 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. ^ Bill Bryson, A Short History of Nearly Everything

[edit] 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