Economy

The Cobra Effect

In India, during the British Raj, the authorities thought that the number of cobras in the country was causing a hindrance to agriculture. As a consequence, they proposed to reward any person who would bring a killed cobra. They felt that such a reward would incentivise the people to take action against the increasing number of cobras.

In turn, what actually happened was paradoxical. People started breeding cobras for the greed of the reward. When the British had their misgivings about this, they did away with the reward. Consequently, all the bred cobras were released, which caused the cobra population to mushroom beyond estimation. This was termed as the cobra effect. It is a scenario of perverse incentivisation, where incentives do not work according to the plan.

It seems analogous to say that making seatbelts compulsory along with the new provision of airbags in motor vehicles adds to the preventive incentive towards reducing accidents, but this in turn increases the instances of rash driving, barely denting the road accident rates.

Perverse incentives have anecdotes in common with how we behave in our day to day lives. Take for example, the numerous online sales and discount weeks in actuality discourage the rise of sales. The expectation of buying goods at a cheaper price on a weekend than a weekday, delays the purchase. Since the companies calculate losses in terms of money lost out of products selected in the carts which remain unpurchased, the whole incentive of promotional discounts backlashes on the online store. Another very critical example is the unrealistic sales goals for bank employees set by Wells Fargo, which exerted enormous pressure on employees to meet those targets. This resulted in the rampant opening of unauthorized accounts by employees in order to meet their goals and keep their jobs. Thus, some incentives can perversely affect the cause behind application of these incentives. Understanding the dynamics of incentives becomes crucial so that the harms of perverse incentivising can be minimised. Here, two other paradoxes are important to be analysed so that we may understand the principles behind perverse incentives.

Inspector’s Paradox

 The achievement of a perfect state of the system, in which the appearance of unwanted effects is impossible is not of the utmost interest of the controller. The maintenance of her strength and position of reverence relies on the time until the final aim is not realised. The controller can only prove her usefulness to a period where efficacy still prevails. If the incentive realises the motive sooner, the power is lost sooner. The controller has to act responsive and responsible in facilitating changes and corrective interventions. Perverse incentives play to her favour where she can superimpose her authority after detecting errors and act superficially to try and improve efficiency thereby increasing her prominence.

Dog Catcher Paradox

 The story of the repairer who does not make a perfect intervention, but leaves some “seeds” for future defects to be called in to solve, exemplifies the second Paradox. “Zero defects now” does not necessarily mean “zero causes” of defects in the future. It is explained as the success of a dog catcher’s job that leads to destruction of their own cause for the job. No stray dogs on the streets implies no need for dog catchers. Conversely, this implies, that for the permanence of a job, the dog catchers will have to ensure the perpetual existence of stray dogs.

The will to survive, to become perennial and to grow out of any organic system has become the root cause of perverse incentives. These paradoxes claim that perverse incentives can definitely be intentional. Thus, the existence of a problem creates an organisation for a solution and if the organisation works efficiently to remove what led to its own creation, then they are fuelling their own demise.

To conclude, it can be said that perverse incentives are in effect wrong managerial decisions, intentional or unintentional. It may occur accidentally because of poorly substantiated managerial decisions about the connections between rewards, generated behaviours and present or future status of the system. However, it is equally probable that they are instated willingly to get the desired impact of creating problems within the system which may extend their own lifespan and allow for unethical individual benefits.

Picture Credits : geckoboard.com



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