What Is a Perverse Incentive?

A perverse incentive is an incentive that is created by a certain event or change that is unintended, and generally negative. The perverse incentive is something that the creators of a plan did not anticipate, and commonly, it’s something that works against their intentions. This idea is used in business, as well as in journalism and other forms of English communication.

English speakers may use the phrase, “perverse incentive,” to refer to outcomes from different kinds of government regulation, or other actions by government. People can also identify perverse incentives from corporate actions or actions by other powerful parties. For example, the imposition of different kinds of consumer fees can have perverse incentives. The term can even be used in discussing parenting, where some parental restrictions or other actions can have unintended effects on children.

Other specific situations also illustrate how English speakers might identify perverse incentives. Rules in prisons are one example, where well-meaning changes in protocol can have unanticipated effects. People talk about the creation of welfare programs and efforts at energy regulation as having these types of consequences, as well.

It’s important to note that different perverse incentives work in different ways. Sometimes, English speakers use the term to refer to something that is directly related to an action. For example, if a certain cost structure imposed by a company compels customers to buy less instead of more, that is a direct perverse incentive. In other cases, the effect is less directly linked. One example is in education, where some refer to efforts to teach students according to standardized testing goals as having perverse incentives. Here, although “teaching to the test” may actually raise test scores, it can have other more abstract negative effects on students in terms of creative problem solving abilities.

In business, the use of the term can refer to negative consequences for the business itself, or other negative effects on a general community. Some relate perverse incentives to the idea of “moral hazard,” where an unanticipated incentive may lead to a threat to the morals of a society. Businesses use both of these terms to try to avoid a wide range of negatives that could end up harming their bottom lines or giving them extremely bad publicity due to effects on a community or group of consumers.