Perverse incentive

A perverse incentive is a term for an incentive that has the opposite effect to that intended. Perverse incentives are one of the most common forms of unintended consequences.

For example:

• Paying the executives of corporations proportionately to the size of their corporation is intended to encourage them to grow their companies by trading. 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.

• "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.

• 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 that the grain used to make bread. Thus, pig farmers fed bread rather than grain to their pigs.

• A glazier can generate business by encouraging vandals to smash windows.

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.
• http://www.local.dtlr.gov.uk/review/consult/fire.pdf