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, intended to encourage them to grow their companies by trading, has caused many of them to pursue mergers to grow their companies, to the detriment of their shareholders
• funding fire departments by the number of fire calls made, intended to reward the fire departments that do the most work, discourages them from fire-prevention activities
• in India, a program paying people a bounty for each rat pelt handed in, intended to exterminate rats, led instead to rat farming
• requiring strong passwords[?] for access control systems causes many users to write their passwords down (as they are now impossible to remember), negating the security advantage of strong passwords.
• "Three-strikes laws" which are intended to be tough on criminals, but actually encourage them to murder people to avoid getting caught, as the sentence for murder is no worse than the consequences of being caught for the third time.

See also

• moral hazard

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.

External references

• http://www.local.dtlr.gov.uk/review/consult/fire.pdf
• UPI story: Study: 3-strikes laws increase homicides (http://www.upi.com/view.cfm?StoryID=20020913-060859-2341r)