Perverse incentive explained

A perverse incentive is an incentive that has an unintended and undesirable result that is contrary to the intentions of its designers. The cobra effect is the most direct kind of perverse incentive, typically because the incentive unintentionally rewards people for making the issue worse.^{[1] [2]} The term is used to illustrate how incorrect stimulation in economics and politics can cause unintended consequences.

The original cobra effect

The term cobra effect was coined by economist Horst Siebert based on an anecdotal occurrence in India during British rule.^[3] The British government, concerned about the number of venomous cobras in Delhi, offered a bounty for every dead cobra. Initially, this was a successful strategy; large numbers of snakes were killed for the reward. Eventually, however, people began to breed cobras for the income. When the government became aware of this, the reward program was scrapped. When cobra breeders set their snakes free, the wild cobra population further increased.^[4] This story is often cited as an example of Goodhart's law or Campbell's law.^[5]

Examples of perverse incentives

Voting systems

• The ranked-choice voting (RCV) and two-round system often creates perverse incentives for extremism and incompetence, as it can eliminate candidates for being too popular.^[6]

Pest control campaigns

• The Great Hanoi Rat Massacre occurred in 1902, in Hanoi, Vietnam (then known as French Indochina), when, under French colonial rule, the colonial government created a bounty program that paid a reward for each rat killed. To collect the bounty, people would need to provide the severed tail of a rat. Colonial officials, however, began noticing rats in Hanoi with no tails. The Vietnamese rat catchers would capture rats, sever their tails, then release them back into the sewers so that they could produce more rats.^[7]
• Experiencing an issue with feral pigs, the U.S. Army post of Fort Benning (now named Fort Moore) in Georgia offered hunters a $40-bounty for every pig tail turned in.^[8] Over the course of the 2007–2008 program, the feral pig population in the area increased. While there were some reports that individuals purchased pigs' tails from meat processors^[9] then resold the tails to the Army at the higher bounty price, a detailed study of the bounty scheme found different effects from perverse incentives were mainly responsible. Both the pigs' fertility rate and offspring survival rates increased under the scheme. This was due to improved nutrition made available by the feed bait used to attract the animals to hunting sites. Secondly, hunters were found to be more likely to preferentially target large males as "trophy"-quality game, while ignoring females and juveniles as targets. Removal of mature males from the population has a negligible impact on population growth, as remaining mature males can each stud many breeding sows.^[10]

Community safety and harm reduction

• In 2002 British officials in Afghanistan offered Afghan poppy farmers $700 an acre in return for destroying their poppy crops. This ignited a poppy-growing frenzy among Afghan farmers who sought to plant as many poppies as they could in order to collect payouts from the cash-for-poppies program. Some farmers harvested the sap before destroying the plants, getting paid twice for the same crop.^[11]
• Gun buyback programs are carried out by governments to reduce the number of guns in circulation, by purchasing firearms from citizens at a flat rate (and then destroying them). Some residents of areas with gun buyback programs have 3D printed large numbers of crude parts that met the minimum legal definition of a firearm, for the purpose of immediately turning them in for the cash payout.^{[12] [13]}
• The FASTER Act of 2021 in the U.S. was intended to aid those with an allergy to sesame in avoiding the substance by ensuring foods that contain it are labeled. However, the stringent requirements for preventing cross-contamination if the ingredients did not include sesame made it simpler and less expensive for many companies to instead add sesame to their products and label it as an ingredient, decreasing the number of sesame-free products available and creating the risk of an allergic reaction occurring from previously safe foods.^[14]
• In Alberta, under the Child, Youth and Family Enhancement Act, every person must report suspected child abuse to a director or police officer, and failure to do so is punishable by a $10,000 fine plus 6 months of imprisonment,^[15] with the fine increased from $2,000 to $10,000 as a politician's response to a little girl who died of a catastrophic head injury after she was placed in kinship care.^[16] However, according to criminal law professor Narayan, enforcing it would cause people to overreport, which wastes resources, and it would also create a chilling effect that prevents people from reporting child abuse observed over a period of time, as that would incriminate them for failing to report earlier.^[17] There is a similar law in other Canadian provinces.^[18]

Environmental and wildlife protection

• The United States Endangered Species Act of 1973 imposes development restrictions on landowners who find endangered species on their property.^[19] While this policy 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 lucrative development-friendliness of their land because of the presence of an endangered species.^[20] In some cases, endangered species may even be deliberately killed to avoid discovery. This same perverse incentive has also been observed in other countries, including Canada and various European countries.
• In 2005 the UN Intergovernmental Panel on Climate Change began an incentive scheme to cut down on greenhouse gases. Companies disposing of polluting gases were rewarded with carbon credits, which could eventually get converted into cash. The program set prices according to how serious the damage the pollutant could do to the environment was and attributed one of the highest bounties for destroying HFC-23, a byproduct of a common refrigerant, HCFC-22. As a result, companies began to produce more of this refrigerant in order to destroy more of the byproduct waste gas, and collect millions of dollars in credits.^[21] This increased production also caused the price of the refrigerant to decrease significantly, motivating refrigeration companies to continue using it, despite the adverse environmental effects.^{[22] [23]} In 2013, credits for the destruction of HFC-23 were suspended in the European Union.^[24]
• Renewable Heat Incentive scandal (commonly referred to as the Cash for Ash scandal) Introduced by the devolved government in Northern Ireland, the Renewable Heat Incentive (RHI) was a 20-year scheme intended to encourage businesses to reduce energy usage and promote switching to green sources. However, the subsidy for the renewable energy was greater than its cost, which allowed businesses to make a profit by switching to green sources and then increasing their energy use rather than reducing it. In some cases, an income was obtained simply by heating empty buildings. The political fall-out caused the Northern Ireland Executive to collapse in 2017. It was not re-convened until 2020.^{[25] [26]}

Historic preservation schemes

As an incentive to preserve historical buildings, governments may designate older structures as historical properties; such classification may prevent or impede further sale or alteration of the property. Any compensation offered may be significantly less than normal commercial returns on properties or land. Examples related to this type of perverse incentive include:

• The United Kingdom's listed building regulations are intended to protect historically important buildings by requiring owners to seek permission before making changes to buildings that have been listed. In 2017, the owners of an unlisted historic building in Bristol destroyed a 400-year-old ceiling the day before a scheduled visit by listings officers, allegedly to prevent the building from being listed, which could have limited future development.^{[27] [28]}
• According to the National Trust for Historic Preservation an increase in arson in the United States in the 1970s may have been the result of perverse incentives arising from government regulation: In particular, the Tax Reform Act of 1976 provided for loss of tax benefits if owners demolished buildings, possibly promoting arson as a way of clearing land without financial penalty. The law was later altered to remove this aspect.^[29]

Healthcare cost control

• Paying medical professionals and reimbursing insured patients for treatment but not prevention encourages medical conditions to be ignored until treatment is required.^[30] Moreover, paying only for treatment effectively discourages prevention (which would improve quality of life for the patient but would also reduce the demand for future treatments). Payment for treatment also generates a perverse incentive for unnecessary treatments that could be harmfulfor example, in the form of side effects of drugs and surgery. These side effects themselves can then trigger a demand for further treatments.
• Under the American Medicare program, doctors are reimbursed at a higher rate if they administer more expensive medications to treat a condition. This creates an incentive for the physician to prescribe a more expensive drug when a less expensive one might do.^[31]

Humanitarian and welfare policies

• In the 2000s, Canada negotiated a "Safe Third Country Agreement" with the U.S. under which applicants for political asylum could only apply in the first of the two countries they reached, in order to discourage asylum shopping. Among the provisions was one that denied anyone entering Canada at an official port of entry from requesting asylum there, in theory limiting asylum applications to either those filed by refugees in camps abroad or those who could legally travel to Canada and do so at an immigration office. In the late 2010s, some migrants began entering Canada illegally, between official border crossings, at places like Roxham Road between New York and Quebec, since once they were in Canada, they were allowed to file applications with the full range of appeals available to them, a process that could take years. Canada wound up processing thousands more applications for asylum than it had planned to.^[32]
• The "welfare trap" theory describes perverse incentives that occur when money earned through part-time or minimum-wage employment results in a reduction in state benefits that would have been greater than the amount earned, thereby creating a barrier to low-income workers re-entering the workforce.^[33] According to this theory, underlying factors include a 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, then this gives a powerful disincentive to take on such work.^[34]

Promotional schemes and public relations

• Hacktoberfest is an October-long celebration to promote contributions to the free and open-source software communities. In 2020, participants were encouraged to submit four or more pull requests to any public free or open-source (FOS) repository, with a free "Hacktoberfest 2020" T-shirt for the first 75,000 participants to do so.^[35] The free T-shirts caused frivolous pull requests on FOS projects.^[36]
• Around 2010, online retailer Vitaly Borker found that customer posts elsewhere on the Internet about negative experiences with his eyeglass-sale website, DecorMyEyes, actually drove more traffic to it since the sheer volume of links pushed the site to the top of Google searches. He thus made a point of responding to customer complaints about the poor quality of the merchandise they received and/or misfilled orders rudely, with insults, threats of violence and other harassment.^[37] Borker continued these practices under different names throughout the next decade despite serving two separate sentences in U.S. federal prison over charges arising from them.^[38]

Returns for effort

• The 20th-century paleontologist G. H. R. von Koenigswald used to pay Javanese locals for each fragment of hominin skull that they produced. He later discovered that the people had been breaking up whole skulls into smaller pieces to maximize their payments.^[39]
• 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 and unnecessarily adding miles of track.^[40]
• Funding fire departments by the number of fire calls that are made is intended to reward fire departments that do the most work. However, it may discourage them from fire-prevention activities, leading to an increase in actual fires.^[41]

In literature

In his autobiography, Mark Twain says that his wife, Olivia Langdon Clemens, had a similar experience:

Further reading

• Chiacchia, Ken (2017 July 12). "Perverse Incentives? How Economics (Mis-)shaped Academic Science." HPC Wire.
• Web site: Hartley . Dale . October 8, 2016 . The Cobra Effect: Good Intentions, Perverse Outcomes . Psychology Today . en-CA.
• Myers, Norman, and Jennifer Kent (1998). Perverse SubsidiesTax $ Undercutting our Economies and Environments Alike. Winnipeg, Manitoba: International Institute for Sustainable Development.
• Rothschild, Daniel M., and Emily Hamilton [2010] (2020). "Perverse Incentives of Economic 'Stimulus'," Mercatus on Policy Series 66. ; .
• Schuyt, Kirsten (2005). "Perverse Policy Incentives." pp. 78–83 in Forest Restoration in Landscapes, edited by S. Mansourian, Daniel Vallauri, and N. Dudley. New York: Springer. .
• Sizer, N. (2000). Perverse Habits, the G8 and Subsidies the Harm Forests and Economies. Washington, DC: World Resources Institute.
• Kovandzic . Tomislav V. . Sloan . John J. . Vieraitis . Lynne M. . July 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. 10.1111/j.1745-9133.2002.tb00100.x.
• Stephan, Paula (2012). "Perverse incentives." Nature 484: 29–31. .
• "Perverse Incentives for South African AIDS Patients." Center for Global Development (April 8, 2006).
• News: Phillips . Michael M. . In South Africa, Poor AIDS Patients Adopt Risky Ploy . Wall Street Journal . 7 April 2006 . https://web.archive.org/web/20220117021255/https://www.wsj.com/articles/SB114437285980719599 . 17 January 2022.

Notes and References

1. Book: Brickman, Leslie H.. Preparing the 21st Century Church. 2002. 978-1591601678. 326. Xulon Press .
2. Book: Siebert, Horst. Der Kobra-Effekt. Wie man Irrwege der Wirtschaftspolitik vermeidet. Deutsche Verlags-Anstalt. 2001. 3421055629. Munich. de.
3. Web site: Dubner. Stephen J.. 11 October 2012. The Cobra Effect: A New Freakonomics Radio Podcast. 24 February 2015. Freakonomics, LLC.
4. Book: Schwarz, Christian A.. NCD Implementation Guide. Carol Stream Church Smart Resources. 1996. 126. Cited in Brickman, p. 326.
5. News: Coy . Peter . Goodhart's Law Rules the Modern World. Here Are Nine Examples . 12 January 2023 . Bloomberg.com . 26 March 2021 . en.
6. Doron . Gideon . Kronick . Richard . 1977 . Single Transferrable Vote: An Example of a Perverse Social Choice Function . American Journal of Political Science . 21 . 2 . 303–311 . 10.2307/2110496 . 0092-5853.
7. Vann. Michael G.. Michael G. Vann. 2003. Of Rats, Rice, and Race: The Great Hanoi Rat Massacre, an Episode in French Colonial History. French Colonial History. 4. 191–203. 10.1353/fch.2003.0027. 143028274.
8. News: Fort Benning puts a bounty on boars . NBC News . Associated Press . 1 March 2008 . en.
9. Book: ((Animal and Plant Health Inspection Service)) . Animal and Plant Health Inspection Service . Feral Swine Damage Management: A National Approach . Final Environmental Impact Statement . May 27, 2015 . United States Department of Agriculture, APHIS . 78 . https://www.aphis.usda.gov/wildlife_damage/nepa/states/US/us-2015-fs-damage-mgt-a-national-approach-eis.pdf . https://web.archive.org/web/20230520155519/https://www.aphis.usda.gov/wildlife_damage/nepa/states/US/us-2015-fs-damage-mgt-a-national-approach-eis.pdf . 20 May 2023 . Chapter 2: Alternatives; Section 2. Methods Dismissed . U.S. Department of the Interior Fish and Wildlife Service; U.S. Department of Agriculture Natural Resource Conservation Service.
10. Ditchkoff . Stephen S. . Holtfreter . Robert W. . Williams . Brian L. . Effectiveness of a bounty program for reducing wild pig densities . Wildlife Society Bulletin . September 2017 . 41 . 3 . 548–555 . 10.1002/wsb.787. free . 2017WSBu...41..548D .
11. Book: The Afghanistan Papers: A Secret History of the War . 136. 978-1982159023 . Whitlock . Craig . 2021 . .
12. News: Rose . Janus . August 2, 2022 . Someone Made $3,000 Selling 3D-Printed Guns at a Gun Buyback Event . live . https://web.archive.org/web/20220802154455/https://www.vice.com/en/article/akee4e/someone-made-dollar3000-selling-3d-printed-guns-at-a-gun-buyback-event . August 2, 2022 . Vice.
13. News: 11 October 2022 . Participant used a 3D printer to make firearm parts in bulk that he then exchanged for gift cards . . Associated Press.
14. News: Aleccia . Jonel . December 21, 2022 . New label law has unintended effect: Sesame in more foods . Associated Press.
15. Web site: 2023-04-01 . RSA 2000, c C-12 Child, Youth and Family Enhancement Act . 2024-03-14 . CanLII.
16. News: Johnston . Janice . 2019-10-30 . Serenity's Law receives royal assent . 2024-03-14 . Canadian Broadcasting Corporation.
17. News: Graveland . Bill . 2017-10-01 . Alberta urged to enforce law on child abuse reporting . 2024-03-14 . Canadian Broadcasting Corporation.
18. Web site: Rimer . 2019-04-10 . INFORMATION SHEET #7 SUMMARY OF LEGAL REQUIREMENTS FOR REPORTING SUSPICIONS OF CHILD ABUSE . 2024-03-14.
19. Langpap, Christian, and JunJie Wu. 2017. "Thresholds, Perverse Incentives, and Preemptive Conservation of Endangered Species" Journal of the Association of Environmental and Resource Economists 4(S1):S227–S259. .
20. Stephen Dubner and Steven Levitt, Unintended Consequences, New York Times Magazine, 20 January 2008
21. Web site: The Cobra Effect . dead . https://web.archive.org/web/20121018225311/http://freakonomics.com/2012/10/11/the-cobra-effect-full-transcript/ . 2012-10-18 . Freakonomics.
22. News: Rosenthal. Elisabeth. Lehren. Andrew W.. 2012-08-08. Incentive to Slow Climate Change Drives Output of Harmful Gases. The New York Times. 2015-07-02. 0362-4331.
23. Web site: Gupta. Anika. Carbon credit scam slur on Indian firms. https://web.archive.org/web/20150704055413/http://www.hindustantimes.com/newdelhi/carbon-credit-scam-slur-on-indian-firms/article1-599382.aspx. dead. 4 July 2015. 2015-07-02. Hindustan Times.
24. Web site: 23 November 2016. Commission adopts ban on the use of industrial gas credits. 3 November 2019. Climate Action . European Commission.
25. News: 23 December 2016. RHI scandal: RHI 'cash for ash' scandal to cost NI taxpayers £490m. BBC News.
26. News: 16 January 2017 . Stormont crisis: Deadline passes for future of executive . BBC . BBC News .
27. News: Bristol Jacobean ceiling 'destroyed before listings visit'. 1 September 2017. BBC News.
28. News: Press release: Developer mutilates Jacobean ceiling to avoid potential listing. 31 August 2017. Save Britain's Heritage.
29. News: Newcomb . Amelia A. . May 21, 1982 . Historic buildings prove special target for arson . Christian Science Monitor . 2023-01-13 . 0882-7729.
30. Robinson . JC . Reinvention of health insurance in the consumer era. . . 21 April 2004 . 291 . 15 . 1880-6 . 10.1001/jama.291.15.1880 . 15100208.
31. News: Sanger-katz. Margot. 2016-03-10. Medicare Tries an Experiment to Fight Perverse Incentives. The New York Times. 2016-07-30. 0362-4331.
32. News: Keller. Tony. Canada Has Its Own Ways of Keeping Out Unwanted Immigrants. The Atlantic. July 12, 2018. June 30, 2021.
33. Web site: 1997-01-06 . Gassing up the welfare trap machine - . 2023-01-13 . Atlantic Institute for Market Studies . en-US.
34. Web site: Baetjer. Howard. August 24, 2016. The Welfare Cliff and Why Many Low-Income Workers Will Never Overcome Poverty. Learn Liberty.
35. News: 25 September 2020. Hacktoberfest 2020. 31 January 2021. Laravel News.
36. Web site: Claburn . Thomas . Open-source devs drown in DigitalOcean's latest tsunami of pull-request spam that is Hacktoberfest . 2024-02-29 . . en . 1 Oct 2020.
37. News: For DecorMyEyes, Bad publicity is a good thing . David Segal . New York Times . 2010-11-26 .
38. News: Segal. David. Has Online Retail's Biggest Bully Returned?. The New York Times. May 2, 2021. May 3, 2021.
39. Book: III. Carl C. Swisher. Java Man: How Two Geologists Changed Our Understanding of Human Evolution. Curtis. Garniss H.. Lewin. Roger. 2001. University of Chicago Press. 978-0226787343.
40. Mark Zwonitzer, writer, PBS American Experience documentary "Transcontinental Railroad" (2006) "Program Transcript . Transcontinental Railroad . WGBH American Experience"
41. Department for Communities and Local Government (2002). "Fire" . In Consultation on the Local Government Finance Formula Grant Distribution. Retrieved November 10, 2006.