Avoiding Perverse Incentives

Audrey Ali, Aparicio PM, Honorbound

Policies are created to somehow improve society and the economy; however, they can result in unintended negative outcomes. In the case of FAA administrator Jane Garvy, an intention to prevent injuries and save lives by requiring airline flyers to put all infants and toddlers in car seats could have consequently led to an increase in injuries and deaths. Although meant to increase safety, the policy was harmful since families might choose to drive instead of purchasing an additional seat [1]. The policy could have resulted in even more injuries and deaths because driving is significantly more dangerous than flying. Thus, if incentives are not completely anticipated, good intentions can easily lead to bad outcomes, known as perverse incentives.

Contrary to the airline issue, “good policy uses incentives to some positive end [2].” For example, London solved its issue of traffic congestion by charging a fee to drive through a section of the central city during the hours of 7:00 a.m. and 6:30 p.m. As a result, traffic fell 20 percent as many commuters chose to use public transportation. The only unintended consequence was that the collected revenue was lower than expected and some shoppers were discouraged from visiting central London, therefore affecting some stores [3]. However, this policy represents good policy because it diminishes the issue at hand with very minimal negative outcomes. London’s traffic policy was acceptable because it accomplished its goal of decreasing traffic in exchange for lower than expected revenue and a minor decrease in shoppers, a minimal cost.

Although achieving good policy appears manageable, many policies continue to have issues. Currently, Supplemental Security Income offers disability checks to impoverished families of children suffering from handicaps. Although it may seem completely benevolent, even offering help to struggling families can have unintended consequences. The system has been criticized for encouraging families to get their children diagnosed in order to obtain extra income, which greatly affects the kids when they are reevaluated for financial support after turning 18. A study by Manasi Deshpande proves that taking away the SSI benefit after the child enters adulthood encourages them to work more, but they are incompetent of making up for the loss in income [4]. These people tend to end up poorer and have fluctuating incomes from year to year. For parents, the response is the opposite and when they lose funds, they tend to work harder and make up for the loss. As Kristof states, “we shouldn’t try to fight poverty with a program that sometimes perpetuates it [5].” The program’s intention to provide assistance to poor and disabled families is risky because it discourages parents from strengthening their child’s education, which has a life-long effect on that child.

Bad policy “either ignores incentives, or fails to anticipate how rational individuals might change their behavior to avoid being penalized [6].” Perhaps it is harsh to label the system of disability checks as “bad policy,” but it requires changes in order to better protect society. It is necessary to understand that there is no such thing as a perfect policy, only good policy. No matter how thorough a policy maker is in anticipating behavior, each policy inevitably results in some sort of consequence. Policies are considered good when its benefits greatly outweigh the bad, which can be accomplished if all possible outcomes are accounted for when creating policies.

 

 

[1] Charles Weelan, Naked Economics: Undressing the Dismal Science (New York: W.W. Norton & Company, 2010), 37.

[2] Charles Weelan, Naked Economics: Undressing the Dismal Science (New York: W.W. Norton & Company, 2010), 38.

[3] Ibid

[4] Guo, Jeff. “What happens when you take away disability benefits from kids and their parents.” The Washington Post. December 16, 2014. Accessed June 18, 2017. https://www.washingtonpost.com/news/storyline/wp/2014/12/16/kids-dont-earn-more-when-their-disability-checks-disappear-but-their-parents-do/?utm_term=.3cd6960f386f.

[5] Kristof, Nicholas. “Profiting From a Child’s Illiteracy.” The New York Times. December 08, 2012. Accessed June 18, 2017.  http://www.nytimes.com/2012/12/09/opinion/sunday/kristof-profiting-from-a-childs-illiteracy.html?pagewanted=all&_r=0.

[6] Charles Weelan, Naked Economics: Undressing the Dismal Science (New York: W.W. Norton & Company, 2010), 39.

 

 

 

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