Perverse incentive

In economics, a perverse incentive is an incentive structure with undesirable results, particularly one where those effects are unexpected and contrary to the intentions of its designers.^[1]

The results of a perverse incentive scheme are also sometimes called cobra effects, where people are incentivized to make a problem worse. This name was coined by economist Horst Siebert in 2001 based on a historically dubious anecdote taken from the British Raj.^[2][3] According to the story, the British government, concerned about the number of venomous cobras in Delhi, offered a bounty for every dead cobra. Initially, this was a successful strategy; large numbers of snakes were killed for the reward. Eventually, however, people began to breed cobras for the income. When the government became aware of this, the reward program was scrapped, and the cobra breeders set their snakes free, leading to an overall increase in the wild cobra population.^[4][5] While the cobra anecdote is historically unverifiable, a close parallel with actual historical evidence is the Great Hanoi Rat Massacre, leading to alternative moniker Rat Effect.^[6]

Besides pest eradication campaigns, perverse incentives arise in various other fields such as electoral systems, community safety and harm reduction, environmental and wildlife protection, historical preservation plans, healthcare cost control, humanitarian and welfare policies, promotional plans and publicity. These incentives are often designed to achieve short-term goals, but in the long run, they lead to bigger problems or undermine the original objectives.

• The Great Hanoi Rat Massacre occurred in 1902, in Hanoi, Vietnam (then known as French Indochina), when, under French colonial rule, the colonial government created a bounty program that paid a reward of 1¢ for each rat killed.^[3] To collect the bounty, people would need to provide the severed tail of a rat. Colonial officials, however, began noticing rats in Hanoi with no tails. The Vietnamese rat catchers would capture rats, sever their tails, then release them back into the sewers so that they could produce more rats.^[7][8]
• Experiencing an issue with feral pigs, the U.S. Army post of Fort Benning in Georgia offered hunters a $40-bounty for every pig tail turned in.^[9] Over the course of the 2007–2008 program, the feral pig population in the area increased. While there were some reports that individuals purchased pigs' tails from meat processors^[10] then resold the tails to the Army at the higher bounty price, a detailed study of the bounty scheme found different effects from perverse incentives were mainly responsible. Both the pigs' fertility rate and offspring survival rates increased under the scheme. This was due to improved nutrition made available by the feed bait used to attract the animals to hunting sites. Secondly, hunters were found to be more likely to preferentially target large males as "trophy"-quality game, while ignoring females and juveniles as targets. Removal of mature males from the population has a negligible impact on population growth, as remaining mature males can each stud many breeding sows.^[11]

• In 2002, British officials tasked with suppressing opium production in Afghanistan offered poppy farmers $700 an acre in return for destroying their crop. This ignited a poppy-growing frenzy among Afghan farmers, who sought to plant as many poppies as they could in order to collect payouts from the cash-for-poppies program. Some farmers harvested and sold the sap before destroying the plants, receiving significantly more money for the same amount of poppies.^[12]
• Gun buyback programs are carried out by governments to reduce the number of guns in circulation, by purchasing firearms from citizens at a flat rate (and then destroying them). Some residents of areas with gun buyback programs have 3D printed large numbers of crude parts that met the minimum legal definition of a firearm, for the purpose of immediately turning them in for the cash payout.^[13][14]
• In 2021, the US Congress enacted stringent requirements to prevent sesame, a potential allergen, from cross-contaminating other foods. Many companies found it simpler and less expensive to instead modify their recipes and add sesame directly to the other foods as an ingredient, and thus avoid being affected by the law.^[15]
• In Alberta, under the Child, Youth and Family Enhancement Act, every person must report suspected child abuse to a director or police officer, and failure to do so is punishable by a $10,000 fine plus 6 months of imprisonment.^[16][17] However, according to criminal law professor Narayan, enforcing it would cause people to overreport, which wastes resources, and it would also create a chilling effect that prevents people from reporting child abuse observed over a period of time, as that would incriminate them for failing to report earlier.^[18] There are similar laws in other Canadian provinces.^[19]

• The United States Endangered Species Act of 1973 imposes development restrictions on landowners who find endangered species on their property.^[20] While this policy has some positive effects for wildlife, it also encourages preemptive habitat destruction (draining swamps or cutting down trees that might host valuable species) by landowners who fear losing the lucrative development-friendliness of their land because of the presence of an endangered species.^[21] In some cases, endangered species may even be deliberately killed to avoid discovery.^[20]
• In 2005 the UN Intergovernmental Panel on Climate Change began an incentive scheme to cut down on greenhouse gases. Companies disposing of polluting gases were rewarded with carbon credits, which could eventually get converted into cash. The program set prices according to how serious the damage the pollutant could do to the environment was and attributed one of the highest bounties for destroying HFC-23, a byproduct of a common refrigerant, HCFC-22. As a result, companies began to produce more of this refrigerant in order to destroy more of the byproduct waste gas, and collect millions of dollars in credits.^[22] This increased production also caused the price of the refrigerant to decrease significantly, motivating refrigeration companies to continue using it, despite the adverse environmental effects.^[23][24] In 2013, credits for the destruction of HFC-23 were suspended in the European Union.^[25]
• In 2017, the Northern Irish Renewable Heat Incentive paid businesses to replace coal with renewable heating, typically bioenergy in the form of wood pellets. However, the subsidy for the energy was greater than its cost, which allowed businesses to make a profit simply by burning as much fuel as possible and heating empty buildings. The political fall-out caused the Northern Ireland Executive to collapse in 2017. It was not re-convened until 2020.^[26][27]

• The United Kingdom's listed building regulations are intended to protect historically important buildings, by requiring owners to seek permission before making any changes to listed buildings. In 2017, the owners of an unlisted historic building in Bristol destroyed a 400-year-old ceiling the day before a scheduled visit by listings officers, allegedly to prevent the building from being listed, which could have limited future development.^[28][29]
• The Tax Reform Act of 1976 provided for loss of tax benefits if owners demolished buildings. This led to an increase in arson attacks in the 1970s as a way of clearing land without financial penalties. The law was later altered to remove this aspect.^[30]

• Paying medical professionals and reimbursing insured patients for treatment but not prevention encourages medical conditions to be ignored until treatment is required.^[31] Moreover, paying only for treatment effectively discourages prevention (which would improve quality of life for the patient but would also reduce the demand for future treatments).
• Payment for treatment generates a perverse incentive for unnecessary treatments. In 2015, a Detroit area doctor was sentenced to 45 years of prison for intentionally giving patients unnecessary cancer treatments, for which health insurance paid him at least 17.6 million dollars.^[32] Unnecessary treatment may harm in the form of side effects of drugs and surgery, which can then trigger a demand for further treatments themselves.
• In the United States, Medicare reimburses doctors at a higher rate if they administer more expensive medications to treat a condition. This creates an incentive for the physician to prescribe a more expensive drug when a less expensive one might do.^[33]

• In the 2000s, Canada negotiated a "Safe Third Country Agreement" with the U.S. under which applicants for political asylum could only apply in the first of the two countries they reached, in order to discourage asylum shopping. Among the provisions was one that barred anyone entering Canada at an official port of entry from requesting asylum there, in theory limiting asylum applications to either those filed by refugees in camps abroad or those who could legally travel to Canada and do so at an immigration office. In the late 2010s, some migrants began entering Canada illegally, between official border crossings, at places like Roxham Road between New York and Quebec, since once they were in Canada, they were allowed to file applications with the full range of appeals available to them, a process that could take years. Canada wound up processing thousands more applications for asylum than it had planned to.^[34]
• A welfare trap is a situation where a person would make less money working (or working more hours) than they do receiving state benefits, as a result of means testing rendering them ineligible for benefits.^[35][36]

• Hacktoberfest is an October-long celebration to promote contributions to the free and open-source software communities. In 2020, participants were encouraged to submit four or more pull requests to any public free or open-source (FOS) repository, with a free "Hacktoberfest 2020" T-shirt for the first 75,000 participants to do so.^[37] The free T-shirts caused frivolous pull requests on FOS projects.^[38]
• Around 2010, online retailer Vitaly Borker found that online complaints about his eyeglass-sale website, DecorMyEyes, pushed the site to the top of Google searches and drove more traffic. He began responding to customer reports of poor quality and/or misfilled orders with insults, threats of violence, and other harassment.^[39] Borker continued writing toxic replies for a decade despite serving two separate sentences in U.S. federal prison over charges arising from them.^[40]

• The 20th-century paleontologist G. H. R. von Koenigswald used to pay Javanese locals for each fragment of hominin skull that they produced. He later discovered that the people had been breaking up whole skulls into smaller pieces to maximize their payments. When he cancelled the payments, many locals burned the remaining skulls they had as retaliation.^[41]
• In building the first transcontinental railroad in the 1860s, the United States Congress agreed to pay the builders per mile of track laid. As a result, Thomas C. Durant of Union Pacific Railroad lengthened a section of the route, forming a bow shape and unnecessarily adding miles of track.^[42]
• Funding fire departments by the number of fire calls that are made is intended to reward fire departments that do the most work. However, it may discourage them from fire-prevention activities, leading to an increase in actual fires.^[43]

• An example in social choice is perverse response,^[44] where a candidate can lose an election if the voters rank them higher. This occurs under single transferable vote and related systems (like primary elections and the two-round system).^[7]

In his autobiography, Mark Twain says that his wife, Olivia Langdon Clemens, had a similar experience:^[45]

Once in Hartford the flies were so numerous for a time, and so troublesome, that Mrs. Clemens conceived the idea of paying George a bounty on all the flies he might kill. The children saw an opportunity here for the acquisition of sudden wealth. ... Any Government could have told her that the best way to increase wolves in America, rabbits in Australia, and snakes in India, is to pay a bounty on their scalps. Then every patriot goes to raising them.

A 2025 investigation by the Friends of Snakes Society cast doubt on the historicity of Siebert's anecdote. The investigation found no contemporary records of cobra breeding operations or prosecutions in British India, and traced the story to an 1873 newspaper article that used speculative language ("it was alleged") rather than confirmed evidence. The investigation also uncovered that an 1887 inquiry by the Bombay Natural History Society, conducted specifically to address these rumors, concluded that breeding cobras in confinement was "highly improbable" and had never been documented. The Madras bounty program was actually scaled back in 1873 (restricting rewards to cobras only and cutting the bounty from two annas to one) due to high costs and not fraud. Despite 150 years of circulation, no documentation has been found to support the breeding claims that form the basis of the "cobra effect" term. It recommended retiring the term "Cobra Effect," stating: "Continuing to use 'Cobra Effect' today is not innocent shorthand. It perpetuates colonial misinformation that caricatured Indians as cunning opportunists."^[46]

• Conflict of interest – Situation when a party is involved in multiple interests
• Campbell's law – Adage about perverse incentives
• Goodhart's law – Adage about statistical measures
• Instrumental convergence – Hypothesis about intelligent agents
• Moral hazard – Increases in the exposure to risk when insured, or when another bears the cost
• Streisand effect – Increased awareness of something after suppression efforts
• The purpose of a system is what it does – Systems thinking heuristic
• Tragedy of the commons – Overuse of a shared resource

• Chiacchia, Ken (12 July 2017). "Perverse Incentives? How Economics (Mis-)shaped Academic Science." HPC Wire.
• Hartley, Dale (8 October 2016). "The Cobra Effect: Good Intentions, Perverse Outcomes". Psychology Today.
• Myers, Norman, and Jennifer Kent (1998). Perverse Subsidies – Tax $ Undercutting our Economies and Environments Alike. Winnipeg, Manitoba: International Institute for Sustainable Development.
• Rothschild, Daniel M., and Emily Hamilton [2010] (2020). "Perverse Incentives of Economic 'Stimulus'," Mercatus on Policy Series 66. SSRN 3561693; doi:10.2139/ssrn.3561693.
• Schuyt, Kirsten (2005). "Perverse Policy Incentives." pp. 78–83 in Forest Restoration in Landscapes, edited by S. Mansourian, Daniel Vallauri, and N. Dudley. New York: Springer. doi:10.1007/0-387-29112-1_11.
• Sizer, N. (2000). Perverse Habits, the G8 and Subsidies the Harm Forests and Economies. Washington, DC: World Resources Institute.
• Kovandzic, Tomislav V.; Sloan, John J.; Vieraitis, Lynne M. (July 2002). "Unintended Consequences of Politically Popular Sentencing Policy: The Homicide-Promoting Effects of 'Three Strikes' in U.S. Cities (1980–1999)". Criminology & Public Policy. 1 (3): 399–424. doi:10.1111/j.1745-9133.2002.tb00100.x.
• Stephan, Paula (2012). "Perverse incentives." Nature 484: 29–31. doi:10.1038/484029a.
• "Perverse Incentives for South African AIDS Patients." Center for Global Development (8 April 2006).
• Phillips, Michael M. (7 April 2006). "In South Africa, Poor AIDS Patients Adopt Risky Ploy". Wall Street Journal. Archived from the original on 17 January 2022.