Bella Weis

In an economy where human beings act in their own self-interest in order to better themselves, these acts generally benefit society as a whole, as seen in the “Who Feeds Paris” scenario. In contrast, sometimes humans acting in their own self-interest actually makes society worse off; that is where incentives come in to play. Incentives are designed to correct a flaw in the economy due to human behavior. But sometimes incentives can go wrong too. An incentive should be abolished or fixed when its hardships outweigh the benefits and it becomes a perverse incentive because humans are unpredictable.

Charles Wheelan outlines this problem by stating, “Good policy uses incentives to channel behavior toward some desired outcome. Bad policy either ignores incentives, or fails to anticipate how rational individuals might change their behavior to avoid being penalized” [1]. Human behavior can never be fully predicted ahead of time, and that is why some incentives go wrong. One example of a perverse incentive revolved around the safety of infants in airplanes. Before the incentive was instituted, infant would fly with their parents and share a seat with them. FAA administrator Jane Garvey felt this was unsafe and required families to purchase an additional ticket for the infants. Her desired outcome was increased safety for the infants. This incentive looked functional until it was actually put in place. As a result of it, families drastically reduced travelling via airplanes and turned to travelling via car due to the high costs of airplane tickets. Requiring the additional purchase of a ticket turned many families completely away from this mode of transportation and attracted them to driving. As a matter of fact, though, driving is a much more dangerous mode of transportation and put infants in more danger than the laps of their parents on airplanes did. In the end, the intention of the incentive completely backfired and caused a result in which the incentive made people worse off instead of protecting them. This problem is called the “law of unintended consequences” [1].

An example of an incentive gone wrong due to unpredictable human behavior is the Shea nut order of The Body Shop Company. Starting in the 1990’s, The Body Shop recognized an abundance of Shea nuts in Ghana and started placing giant orders and rewarding locals with more money if they left their jobs and became Shea nut farmers. As a result, many locals left their jobs and focused mainly on the production of Shea nuts and Shea butter. For a while these farmers made much profit, but as the demand for Shea butter products fell, so did the demand for Shea nuts. The Body Shop stopped placing orders and Ghana locals were left unemployed and poorer than they were before at their original jobs [2]

As a result, dysfunctional or perverse incentives make society worse off than without their institution. It is the responsibility to either fix the incentive in a manner where it benefits society, just like its prediction said it would, or abolish it completely. Human actions cannot be predicted, therefore incentives are so difficult to create. But overall, an incentive should benefit society more than harm it.

[1]

Wheelan, Charles. Naked Economics (W. W. Norton & Company: United States of America, 2010), 36-39

[2]

Heath, Joseph. Incentives Gone Wrong: Cobras, Severed Hands, and Shea Butter (Farnman Street 2016)

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