Perverse Incentive: What a Concept!

**Entri yang ditulis akibat sangap terlampau.

I came across this concept in the Wikipedia while searching for the explanation on ‘Boards of Directors’. Perverse Incentive means an incentive that has an unintended and undesirable effect, that is against the interest of the incentive makers. Perverse incentives by definition produce negative unintended consequences. You know, when things go wrong, not in the way you want it to be?

I had a good laugh.
And possible headache too, if I dwell on this too much.

Some examples:

  • 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.
  • 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.
  • 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
  • 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.
  • 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.
  • Management might stash away money in a slush fund, in case there isn’t enough profit during the next quarter for management to make their bonuses. The incentive based management pay can thus perversely make the company less profitable.
  • 19th century palaeontologists traveling 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

The last one was brilliant eh?


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