Perverse Incentives

In making policy, it seems that sometimes the possibility of unintended consequences is not considered. Unfortunately, whether by oversight or some other force, policies get created which create perverse incentives. Our complicated tax law has got people doing all kinds of unproductive things in order to get around paying taxes. In our welfare programs, we have some systems in place which actually make or keep people impoverished.

For example, consider a program which provides health insurance for families below the poverty line. For a family of four, this would be an income of $21,200 annually. If a job offer were extended to the father of this family for $30,000 per year, without health insurance, should he take it? It appears so, but actually, he might be worse off. If the health care benefit he is receiving is worth $12,100 per year (the average annual premium for an employer health plan covering a family of four), then in the first case, he is making practically $33,300; in the second case, he is only getting $17,900. The perverse incentive is for him to stay below the poverty line by staying underemployed.

What do you get when you extend welfare benefits to unwed mothers? Why, more unwed mothers, of course. This, in turn, creates more poverty. I’m sure the designers of our welfare programs did not intend to make more people impoverished. The fact is, when you pay for something, you get more of it.

The No Child Left Behind Act seems like a good idea, right? I mean, nobody wants to leave a child behind. The Act requires that schools show improvement in student test scores. This provides an incentive for the school to encourage low-performing students to drop out before they take the test. Oops.

Or, consider the various Digital Rights Management schemes which make it harder to copy and access music, movies, or video games. It seems like a good idea, right? But there are some fair uses of copyrighted material which DRM prevents, like saving your movies to your computer’s hard drive so you can watch them without having to bother with the discs. Since pirated content doesn’t have these restrictions, it creates a perverse incentive for people to pirate content instead of buying it, which is exactly the opposite of what the designers intended.

Instead of blindly reforming, we need to carefully consider all the implications of a policy before implementing it. There is an ecological balance, and if you adjust one side of the equation, you’ve got to deal with the other side, too.

3 thoughts on “Perverse Incentives

  1. Here here. Your arguments are well thought out and valid. I am particularly enamoured with the DRM plight we seem to be in. Every time I watch a DVD I cringe at all of the warnings and other useless junk I am forced to wade through because of DRM. When I get a DVD I want to watch a movie not ads, not previews, and certainly not the MPAA telling me not to pirate. The pirated version of most DVDs and games are superior to what is being sold – and until the producers realize this, they are dealing with an uphill battlewith the pirates winning. Produce a better product and you will see people embrace it – force people to do things your way, and you will lose what few customers you have.

  2. Superior to what is being sold? Pirated copies ARE what’s being sold, plus the benefit of being illegal and negligent of copyright. Isn’t it funny how, in the name of entertainment, we are willing to flaunt the laws that may someday attempt to protect us and our work?

    The fact is, piracy will always be more profitable than legitimate media production, at least in the presence of blank media, because production costs are almost negligible. Pirates will always win. This was true when pirates stole manufactured goods and sold them, and it remains true in the age of data theft. The only way to combat this is to get rid of the pirates, or to provide measures within the data to prevent its use, usually by using frequent (and annoying) authentication. What we really need is for the public to practice a little self-control and stop using pirates altogether.

    As to the concept of perverse incentives, let me add a couple: first, business and tax incentives. Businesses receive tax incentives to move into an area, but are not required to stay in the area until those taxes are compensated for. Many businesses have come to Utah under the pretense that 10 years (or more) in the area will provide taxes equivalent to the incentive, then stay for 3 or 4 or 6, then abandoning or selling their free property for a nice profit. THAT’S a perverse incentive, when local governments must beg–er, pay–companies to sell things in their area, thus charging the taxpayers double for the company’s services.

    And the number one most perverse indescribably ridiculous and overall corrupting incentive of all time: the profit motive! Yay! The very idea that the primary benefit labor is individual and not social, especially considering a modern context of economic vastness and integration, is perverse. Anyone who thinks that what he “earns” is his, or that the products of his labor are discreet, is giving himself far too much credit. This one, IMHO, tops the list.

    Of course, I understand that your post is primarily about perverse incentives (or latent dysfunctions) in government programs, but I couldn’t help but mention that one little incentive that is so often ignored in discussions of this sort.

  3. After reading your links, I think you need to reconsider posting the first. Its information is hardly supportive of the claim to which you bind it. While unwed mothers HAS increased, its correlation with increased availability of welfare is hardly conclusive. You are arguing a commonly believed point, but let me remind you that promiscuity and unprotected sex can be more closely tied to anti-government and independence groups, such as hippies, peaceful anarchists, and feminists, than to individuals who are government dependent. I believe that a teen who gets pregnant is still devastated by the fact. I don’t believe there are that many who are justifying their behavior by saying, “I have no ambitions in life. I just want to take care of babies and let the government take care of me. Also, welfare reform has kind of killed the idea of the long-term welfare recipient.

    Consider the above ideas, as well as the following: there are fewer shotgun weddings these days, less willingness to marry young, less interpersonal responsibility, and these coupled with the need for an education in order to compete for median income, the number of women considered “below the poverty line” (which is a social definition, I remind you) will naturally increase–even if actual teen pregnancy numbers have gone down. I’m not arguing that they are, of course, but I am just providing perspective.

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