Perverse Incentive

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A perverse incentive is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers. Perverse incentives are a type of unintended consequences. For example, 19th century palaeontologists traveling to China used to pay peasants for each fragment of dinosaur bone (dinosaur fossils) that they produced. They later discovered that the peasants dug up the bones and then smashed them into many pieces, greatly reducing their scientific value, to maximise their payments. In Hanoi, under French colonial rule, a program paying people a bounty for each rat pelt handed in was intended to exterminate rats. Instead, it led to the farming of rats. Funding fire departments by the number of fire calls made is intended to reward the fire departments that do the most work. However, it may discourage them from fire-prevention activities, which reduce the number of fires.

In 1696, the English Parliament adopted a tax under which dwellings were to be assessed according their number of windows. Although the tax was intended to be progressive in that it exempted houses with fewer than ten windows from the bulk of the assessment, in operation it exacerbated the gap in living conditions between rich and poor as landlords were incentivized to brick up tenement windows to reduce their tax liability, leaving working-class tenants with insufficient light and ventilation. In 2007, the Bangkok, Thailand police switched to punitive pink armbands adorned with the cute Hello Kitty cartoon character when the tartan armbands that had been intended to be worn as a badge of shame for minor infractions were instead treated as collectibles by offending officers forced to wear them.

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