Incentives. We love them. Without our parents’ offer of a cash bonus for good grades, we probably would have totally blown off Mrs. Smethels’ Home Economics class in 8th grade. The incentive of a lower premium on auto insurance for good drivers is a good motivation to observe the posted speed limit.
Negative incentives are helpful, too. We could present a list of names at this very moment of some truly irritating people who are alive right now solely because this writer doesn’t want to go to prison for murder.
For all the good that incentives do, it is important to consider all the possible consequences. As well intentioned as an incentive may be, it could result in giving you the opposite of what you hoped for.
Delhi’s Cobra Bounty Scheme
Consider, for example, the situation in Delhi, India, during the time of British colonial rule. Delhi was plagued by deadly cobras. The government wanted to do something that would address all of the deaths and serious injuries the venomous serpents inflicted each year on the citizens.
Someone suggested offering a cash bounty for every dead cobra. What a fantastic idea! Surely this incentive would lead people to seek out the cobras, kill them, and remove the threat to health and safety. Offering the bounty would effectively make the entire human population into a pest-control business.
At first, the plan worked beautifully. People who were eager for some extra money hunted the cobras and turned in piles of corpses in exchange for cash.
That’s when the cobra bounty scheme went off the tracks. It wasn’t long before aspiring entrepreneurs realized it would be more lucrative to breed cobras for the bounty. Rather than go to the trouble of hunting for them, they could raise the snakes at home and rake in the bounty at their leisure.
Once this loophole was discovered, the government put an end to the cobra bounty program. The cobra breeders, now having no incentive to continue to raise their now-worthless snakes, turned them loose. The final result of the cobra bounty program was a net increase in the number of cobras in Delhi.
What happened in Delhi has been dubbed “The Cobra Effect” by economist Horst Siebertbased. It describes an incentive that has an unintended and undesired result that is contrary to the intentions of the designers. Otherwise known as a “perverse incentive,” it tends to show up most spectacularly through government programs.
Northern Ireland’s Renewable Heat Incentive
The government of Northern Ireland introduced the Renewable Heat Incentive plan in 2012. Arlene Foster, Minister for Enterprise, Trade, and Investment, spearheaded the plan to encourage the use of renewable energy. The government offered a subsidy to applicants who switched from fossil fuel to green sources.
In theory, this sounds like a fine plan. In practice, it failed spectacularly. It wasn’t long before people figured out that the subsidy the government offered was greater than the cost of the fuel. In other words, people and businesses could make money by just turning up the heat. That’s what many people did. Some even went to the extreme of installing heating systems in empty buildings and heating them for no other reason than to collect the subsidy.
By the time all of these unintended consequences came to light, the government was on the hook for up to £500 million. The fall-out caused the collapse of the Northern Ireland Executive in 2017. It was not reconvened until 2020.
USA’s Transcontinental Railroad
The United States’ railroad boom in the mid-19th century saw a massive undertaking to make all of North America accessible by rail. When Congress approved the building of the first transcontinental railroad, it offered an incentive to speed the construction. The incentive subsidized railway builders, paying them for each mile of track they could lay.
The intent of the plan was to get the railroad built as quickly as possible. Since the government used mileage as the measure for the subsidy, rather than the time it took to lay the tracks, the Cobra Effect reared its ugly head. Thomas C. Durant of Union Pacific Railroad had his section of the railroad extended into a long bow shape. It brought plenty of extra subsidies into the coffers and unnecessarily added miles of track to the route.
Quebec’s Duplessis Orphans
The federal Canadian government was concerned about the plight of orphans. It also wanted to bolster the level of care provided by psychiatric hospitals. In each case, the government offered subsidies to the organizations that provided care.
Under the plan, which ran from 1945 to 1960, orphanages received 70 cents per day for each orphan under their care. Psychiatric hospitals were given $2.25 per patient.
Researchers Léo-Paul Lauzon and Martin Poirier issued a report in 1999, showing that the Quebec provincial government under Premier Maurice Duplessis and the Catholic Church made substantial profits by falsely certifying thousands of Quebec orphans as mentally ill. They estimated that religious groups received $70 million in subsidies (measured in 1999 dollars) by claiming the children as “mentally deficient.” At the same time, the government saved $37 million simply by having one of its orphanages redesignated from an educational institution to a psychiatric hospital.
Great Hanoi Rat Massacre
Hanoi had a serious rat problem at the beginning of the 20th century. Then under French colonial rule, its government declared war on rats in 1902 and offered a bounty for every rat killed. Rather than require the bounty hunters to produce a rat’s corpse, all that was needed was a tail to secure the right to a bounty.
Unsurprisingly, the result was much like Delhi’s scheme to defeat cobras. Plenty of rat tails were traded for cash. This didn’t quite equate to a reduction in the rat population, however. It wasn’t long before people began to notice a curious phenomenon. The streets of Hanoi were just as infested with rats as they were before the program, but now the rats scurried about without tails.
A quick investigation confirmed what should have been obvious from the start. Rat catchers had no incentive to kill rats; they were just interested in the tails. By taking the tail off of a dead rat, a bounty hunter could collect a reward. By taking the tail off a live rat and allowing it to scurry away, the hunter could still collect the same reward and be confident that a continuing supply of rats would result from the ones that were allowed to live.
The result of the Great Hanoi Rat Massacre of 1902 was that not very many rats were massacred. A lot lost their tails, and the government lost a lot of money.
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