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What Is a Perverse Incentive?

By A. Leverkuhn
Updated May 23, 2024
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A perverse incentive is an incentive that is created by a certain event or change that is unintended, and generally negative. The perverse incentive is something that the creators of a plan did not anticipate, and commonly, it’s something that works against their intentions. This idea is used in business, as well as in journalism and other forms of English communication.

English speakers may use the phrase, “perverse incentive,” to refer to outcomes from different kinds of government regulation, or other actions by government. People can also identify perverse incentives from corporate actions or actions by other powerful parties. For example, the imposition of different kinds of consumer fees can have perverse incentives. The term can even be used in discussing parenting, where some parental restrictions or other actions can have unintended effects on children.

Other specific situations also illustrate how English speakers might identify perverse incentives. Rules in prisons are one example, where well-meaning changes in protocol can have unanticipated effects. People talk about the creation of welfare programs and efforts at energy regulation as having these types of consequences, as well.

It’s important to note that different perverse incentives work in different ways. Sometimes, English speakers use the term to refer to something that is directly related to an action. For example, if a certain cost structure imposed by a company compels customers to buy less instead of more, that is a direct perverse incentive. In other cases, the effect is less directly linked. One example is in education, where some refer to efforts to teach students according to standardized testing goals as having perverse incentives. Here, although “teaching to the test” may actually raise test scores, it can have other more abstract negative effects on students in terms of creative problem solving abilities.

In business, the use of the term can refer to negative consequences for the business itself, or other negative effects on a general community. Some relate perverse incentives to the idea of “moral hazard,” where an unanticipated incentive may lead to a threat to the morals of a society. Businesses use both of these terms to try to avoid a wide range of negatives that could end up harming their bottom lines or giving them extremely bad publicity due to effects on a community or group of consumers.

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Discussion Comments
By browncoat — On Apr 15, 2014

@irontoenail - I actually read an economist's take on this recently and how perverse incentives can ruin a system because people will always try to take advantage.

He used the example of his toddler, who didn't want to use the toilet when they were teaching her, so he started giving her candy every time she used it properly.

In the end, he realized she had started holding on and only going a little bit at a time so that she could get more candy. She had achieved bladder control, but not the way they wanted her to.

I also couldn't help but wonder at what point they'd be able to take the candy away completely as an incentive (unless they hoped to one day bring her high school teachers in on the scheme).

But the thing is, incentives can work wonders as well. There are examples of schools out there which have completely turned themselves around by giving the students an incentive scheme where they could earn tokens for good behavior. So examples of perverse incentives are not always the whole story.

By irontoenail — On Apr 14, 2014

@Mor - I think education is rife with this kind of incentive. So many good teachers I know have left because of policies that were supposed to make their job easier but actually made it much more difficult.

I think this is the problem with capitalism in general, to be honest. We think it will give people an incentive to work harder, but it ends up making them feel desperate because someone has to lose for others to win.

By Mor — On Apr 13, 2014

I think the most obvious perverse incentive in education at the moment is one that would actually have been fairly obvious if the policy makers had thought about it for even half a moment. When you make formal testing extensive and mandatory, you are taking time away from actual education. If you then link that with the performance of the teacher, and blame everything on their ability to teach, you end up with a problem.

Basically at the moment many teachers are forced to give test after test in order to measure their ability to teach, which stops them from being able to actually teach. They are then labeled "bad teachers" for failing to teach under terrible conditions. And the kids suffer, which is the worst thing. This is supposed to give good teachers the ability to excel and it does the opposite.

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