What Is a Perverse Incentive? Definition and Examples

An incentive is something that motivates or encourages an individual or entity to take a specific action. These motivators, often financial or regulatory, are designed to guide behavior toward a desired outcome. However, well-intentioned incentives can sometimes lead to unexpected, counterproductive results. This phenomenon is known as a “perverse incentive,” where an attempt to solve one problem inadvertently creates new, worse issues. It highlights how actions or policies, despite their positive aims, can yield outcomes contrary to their original purpose.

Defining Perverse Incentives

A perverse incentive is a motivational structure designed to achieve a positive goal, but which encourages behavior leading to an undesirable or opposite result. Its core characteristic is unintended consequences, where the incentive itself fosters the negative outcome. Individuals or organizations behave rationally from their own perspective, seeking to maximize the offered reward, though this can be harmful from a broader system or societal perspective. The “perverse” aspect means the mechanism intended to improve a situation ends up worsening it. This often stems from a narrow focus on immediate, measurable targets rather than the comprehensive objective.

Mechanisms Behind Perverse Incentives

Several underlying factors contribute to the emergence of perverse incentives within systems. A common cause is incomplete information or a lack of full understanding of how individuals will react to an incentive. When incentives are tied to narrow metrics, without considering the broader impacts or potential for manipulation, they can become perverse. For instance, rewarding solely based on quantity can lead to a disregard for quality.

Another mechanism is the misalignment of goals, where the incentive system’s objectives do not align with the ultimate desired outcome. This can occur when short-term thinking dominates, rewarding immediate gains leading to long-term detriment. Complex systems also contribute to perverse incentives, as interventions can have unforeseen ripple effects due to the interdependencies. Organizations might inadvertently create opportunities for manipulation if the incentive structure is easily gamed, leading to behavior that undermines the original intent.

Illustrative Examples

Perverse incentives manifest across various sectors. A classic historical example is the “Cobra Effect.” To reduce the cobra population, a bounty was offered for every dead cobra. Initially, many snakes were killed, but people began breeding cobras to claim the reward, increasing the cobra population. When the bounty was canceled, breeders released their now-worthless snakes, exacerbating the problem.

In the healthcare industry, a perverse incentive can arise when medical professionals are reimbursed for treatments rather than preventative care. This financial structure encourages addressing existing conditions through procedures and medications, but discourages proactive measures that could improve patient health. This incentivizes a focus on illness management over wellness promotion.

Within corporate structures, incentives tied to sales targets or production quotas can backfire. For example, some financial institutions have faced scandals where employees opened unauthorized customer accounts to meet sales goals and earn bonuses. This behavior undermined customer trust and led to regulatory penalties, misaligning the incentive with the company’s long-term interests. Similarly, rewarding programmers based on the number of lines of code written can incentivize verbose and inefficient code.