AP Microeconomics - Perverse Incentives
A note from the author: This is part of a blog series written as assessments for my Microeconomics class – we are provided articles/excerpts and prompts to respond to periodically. Below is the first installment, regarding perverse incentives:
Perverse incentives are a sort of twisted mind-game for economists – they are an unfortunate byproduct of human nature when it’s crammed into the economic framework of incentives we live in today. When so-called “positive” incentives, incentives that, well, incentivise productive behavior or actions, combine to create an incentive for some “bad” action, a perverse incentive arises. There’s loads of examples of these, but one I find particularly poignant is that of a doctor – in theory, doctors are supposed to fix your health issues in the fastest, most straightforward manner possible, but, in reality, they have an incentive to prescribe more procedures, order more appointments, and to generally extend your contact with them because this means you end up paying them more. There’s nuance here, but that covers the jist of perverse incentives - they are rewards for bad behavior.
While minor, perhaps innocuous, perverse incentives are ubiquitous, there are some that have lead to truly gruesome scenarios. One such example is that of hit-to-kill drivers in certain parts of Asia. This 2015 Slate article, “Driven to Kill,” details the frightening recurrence of intentional roadway killings wrought by a legal loophole which allows drivers to skirt murder charges and pay lower fees if their victims are dead, rather just just injured. The incentive here is clear – according to the law, if a driver hits and seriously injures a pedestrian, they are often subject to massive fees, jail time, and, sometimes, they must pay for disability support for the pedestrian. However, a dead pedestrian doesn’t need any disability support or financial reprise, so drivers are fined at much lower rates and are generally able to avoid most jailtime if they simply back up over the person they hit, and later claim they thought it was a garbage bag or debris in the roadway.
In my opinion, this is a great example of legal negligence and represents a side-effect of poorly constructed justice systems – if the courts were to have created a precedent regarding these cases when they first started turning up, they could have remedied the obvious gap in policy. However, a far better solution would be to simply impose higher punishments for killing pedestrians, or, perhaps, easing the punishments for injuring one. This would realign the incentives with the appropriate actions.
Another great, if morbid, manifestation of perverse incentives is that of the ransom/hostage problem. This has been a favorite mind game of economists for some time, and there are, unfortunately, several real-life examples, such as that of Amanda Lindhout, a journalist kidnapped in Somalia. Essentially, the problem breaks down like this: If kidnappers are demanding a ransom for the return of a hostage, it is in the objective interest of society as a whole to not pay the ransom – doing so would simply fund the kidnappers and would prove to them that their methods are effective, eventually creating an incentive to kidnap more people. However, in many cases, the families and governments of hostages face an impossible choice – not paying the ransom will likely lead to the death of the hostage, a personal risk that often ends up outweighing the objective benefit of not paying the ransom. As before, there’s a perverse incentive to counteract what is externally “correct,” but this time there’s a personal element as well as a collective benefit, which makes it closer to a philosophical trolley problem than a normative economics one. Is it worth the life of one person to possibly prevent the kidnappings of more, sometime in the future?
That’s why I really don’t have a straightforward solution to the hostage problem – there probably isn’t one. Many answers go along the lines of “just raid the kidnappers and get the hostage back,” but then we run into problems with those gosh darned international relations. If we stay firmly within the bounds of economic theory here, we could say that we need to shift the incentives for the kidnappers away from kidnapping with something else – something that the podcast about Amanda above touches on. They offer to build a school or provide aid to Somalia in place of a ransom, but that obviously isn’t enough. It would take great effort, but it needs to be more worth the kidnapper’s time to forgo kidnapping and take up normal, legal jobs – we would need to make kidnapping unprofitable by competing with kidnapping. Obviously, that’s not too easy to accomplish in a country facing massive humanitarian crisis, but that’s why I prefer my economics theoretical – and normative.