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11 Examples of Perverse Incentives

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A perverse incentive is a negative unintended consequence of a performance goal, evaluation criteria, incentive program, regulation, policy or system.


A corporate officer who will be heavily rewarded if a firm achieves high profits and will receive a large payment if they are fired has incentives to take excessive risks. If the risks pay off, they will be generously compensated. If the risks cause financial losses, they will be fired and generously compensated.
A CEO will receive a generous golden parachute if their firm is acquired by a competitor. Driving the stock price down with low performance may make acquisition more likely.
Doctors who are paid to treat diseases but aren't compensated for prevention steps.
A private prison that is financially rewarded with higher occupancy when prisoners are denied parole or reoffend.
A military industrial complex that will profit from war.
A government that will obtain increased authority if a large scale disaster occurs.
Subsidies that cause overproduction of a particular crop.
A saleperson who is only rewarded for closing deals with no incentives for post-sales service and relationship building who will generally make more by ignoring customers once they sign a contract even if they cancel their service.
An administrator who will only receive more work if they complete their work quickly such that working slowly is the only way for them to leave the office on time.
A manager who only promotes staff who do not threaten the manager's position with competence, initiative or work ethic.
A student who notices they get higher marks when they regurgitate groupthink as opposed to offering original analysis.
Overview: Perverse Incentives
A system or practice that rewards negative outcomes.
Related Concepts
Next: Moral Hazard
More about conflict of interest and compliance:
Chinese Wall
Dual Agency
Fee Splitting
Fiduciary Duty
Moral Hazard
Profit Motive
Revolving Door
Self Dealing
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