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Posts Tagged ‘perverse incentives’

A quick post, but it was too good to pass up!

On Wednesday we heard the news of the 8 women (4 doubles pairs) in Olympics badminton who have been disqualified from the women’s doubles competition, for “not using one’s best efforts to win”.

It turns out that all teams had already gotten into the quarter-finals but were attempting to lose their match so that they could manipulate the draw for the semi-finals. This is an example of ‘perverse incentives’ – defined as an incentive that has an unintended and undesirable result. In this case, because of the way the organisers had arranged the group stage, in a round-robin format rather than a knock-out format, the format together with how the previous matches had played out had created the perverse incentive of a better outcome for both teams with a loss.

More information on the situation can be found here.

In environmental economics, an example of a case of possible perverse incentives occurred when the European Commission introduced the EU-wide carbon-trading programme. In an allocation method called ‘grandfathering’, EU industries were allocated free CO2 permits based on their historical emissions to minimise any competitiveness loss against non EU companies not included in the scheme (and to help gain acceptance from industry), regardless of the efficiency of their process under the EU Emissions Trading Scheme (EU ETS).  This could lead to an unintended outcome where companies who emit high amounts of carbon produce excessive carbon (through producing excessive output or running plants beyond their efficient life-time), in an effort to increase future allocations of CO2 permits so that they may sell these and make money off them [1].

For more reading on perverse incentives in sport, this webpage has a couple of interesting cases in football. I particularly enjoyed reading the second one about the 1994 Shell Caribbean Cup!

[1] Sato, M., Grubb, M., Kust, J. Chan, K. Korppoo, A. and Ceppi, P. 2007. Differentiation and dynamics of competitiveness impacts from the EU ETS.

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I’m currently reading a book called “Confessions of a GP” by Dr Benjamin Daniels (pseudonym of course) which, amongst anecdotes about the people that he sees in his surgery, gives an interesting insight into the NHS, including the targets system (named the Quality and Outcomes Framework).

As economists we find incentives/disincentives very interesting, particularly how they can have ‘perverse’ (unintended negative) effects as well as their intended effects. I think Dr Daniels gives a very good overview of the way the NHS incentives have affected the individual behaviour of GPs and practices but also the NHS in general.

Daniels starts off a chapter (‘Targets’) with his practice manager suggesting, as Daniels pops out to see an elderly patient that has fallen over, that he diagnose her with a stroke, then goes on to explain how nobody in the surgery’s area has had a stroke in the last nine months. Absence of stroke is great for the health of the patients, but means less money for the surgery, as the surgery will not have hit its ‘stroke target’!

He then explains that these targets can be a good thing, pointing out the example that strokes have been poorly managed for years, but with the right treatment after a stroke or mini stroke, the chance of having another stroke can be significantly reduced. So the targets work by giving doctors the incentive to check a patient thoroughly for signs of a stroke and to send them to a specialist if they do find signs.

He does also point out the perverse incentive side – that these targets can tempt GPs to wrongly diagnose a stroke in order to achieve their targets and therefore earn more money – but he also says that in the ‘vast majority’ of practices that he has worked in the doctors have been incredibly honest in achieving their targets. This sounds reassuring at first glance but then makes me fear about the minority!

In a later chapter (‘Money’) Dr Daniels also talks about how the targets and incentives have affected the NHS overall – prior to the introduction of the targets the NHS was facing a huge loss of GPs to overseas jobs and early retirement, due in part to low pay. As it takes over ten years to train a GP, this meant that the NHS would have faced a severe shortage of GPs.  A pay rise and better working hours were introduced together with the targets/incentives, all of which Daniels attributes to saving the NHS from a large loss of GPs as well as increasing the efficiency of the NHS. Daniels points out that surgeries are privately run and motivated GPs will set up new services to reach new targets and therefore earn more money.  On the flip side of this, the way that people in different classes of society deal with their health and medical problems mean that surgeries in deprived areas have a lot of trouble hitting their targets as patients are less likely to take their medication or attend appointments. This in turn can lead to trouble attracting enthusiastic and dedicated doctors in these areas where often they are needed most.

In policy making in the environmental sector we rely very heavily on incentives and attempt to work out what the unintended consequences of these incentives can be and how to reduce them. This is why you’ll find endless discussions about environmental economics influenced policies such as cap and trade and fishing quotas!

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If you want to find out more about the Quality and Outcomes Framework and see what targets your surgery is hitting, click here.

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