ECONOMIC CONCEPT

What Are Perverse Incentives? When Rewards Backfire

A company rewards employees for the number of customer calls handled. Employees rush through calls. Customer satisfaction drops. The incentive backfired.

Editorial illustration of a person receiving a reward for bad behavior

Creator Unknown (classic economic concept)Origin EconomicsYear ClassicalCategory Economics

QUICK ANSWER

Here is the idea in plain English.

Perverse incentives are incentives that produce unintended, harmful consequences. They occur when a reward structure encourages behavior that is counterproductive to the original goal. The term is often used in economics and public policy. Perverse incentives explain why well-intentioned policies often backfire. They are a common feature of complex systems.

If you remember only a few things, remember these.

The basic move

Perverse incentives are simple: when you reward a behavior, you get more of it. Sometimes the behavior you get is the opposite of what you wanted.

Why it matters

If you reward teachers for test scores, they teach to the test. If you reward employees for call volume, they rush calls. The reward encourages the wrong behavior.

Use it deliberately

When designing an incentive, ask: what behavior will this encourage? What is the unintended consequence?

CORE IDEA

The concept in its simplest useful form.

What Do Perverse Incentives Mean in Simple Terms?

Perverse incentives are simple: when you reward a behavior, you get more of it. Sometimes the behavior you get is the opposite of what you wanted.

If you reward teachers for test scores, they teach to the test. If you reward employees for call volume, they rush calls. The reward encourages the wrong behavior.

The problem is not bad people. It is bad incentives. People respond to rewards. If the reward is misaligned, the behavior will be misaligned.

The small mechanism underneath the big idea.

The Story Behind Perverse Incentives

Perverse incentives have been observed throughout history. The Cobra Effect in colonial India is a classic example. The government offered a bounty for dead cobras. People bred cobras. The problem got worse.

The concept is central to economics. It explains why well-intentioned policies often backfire. The problem is not bad people. It is bad incentives.

Today, perverse incentives are a common topic in economics, public policy, and business. They are a reminder that incentives matter.

Why Perverse Incentives Became Famous

Perverse incentives became famous because they explain a common problem: well-intentioned policies backfire. The concept is widely cited in economics and public policy.

The term is often used to describe the Cobra Effect and other examples of unintended consequences.

Today, perverse incentives are a foundational concept in economics. They are taught in economics classes and applied in policy design.

Diagram showing the cycle of perverse incentives — A diagram showing the cycle of perverse incentives: problem, solution, unintended consequence, worse problem.

Where this idea shows up outside the textbook.

History

The Cobra Effect is the classic example. The government offered a bounty for dead cobras. People bred cobras. The problem got worse.

Business

Employees are rewarded for call volume. They rush calls. Customer satisfaction drops. The incentive backfired.

Education

Teachers are rewarded for test scores. They teach to the test. Students do not learn more. The incentive backfired.

Healthcare

Hospitals are rewarded for patient satisfaction. They prescribe unnecessary opioids. The incentive backfired.

CONCEPT MAP

Every idea has neighbors. This is where the current concept sits in the TinyThat knowledge graph.

Current concept

What Are Perverse Incentives

Nearby idea

Cobra Effect

A solution creates a worse problem.

Nearby idea

Goodhart's Law

When a measure becomes a target, it ceases to be a good measure.

Nearby idea

Unintended Consequences

Outcomes that are not intended.

Nearby idea

Campbell's Law

Social indicators corrupt the process they measure.

What people often get wrong about this idea.

Perverse incentives are always intentional.

No. They are often unintended. The designer of the incentive did not anticipate the behavior change.

Perverse incentives only apply to government.

No. They apply to business, education, healthcare, and everyday life. Any incentive can backfire.

Perverse incentives mean people are bad.

No. People respond to incentives. If the incentive is bad, the behavior will be bad. The problem is the system, not the people.

Useful ideas become dangerous when they are stretched too far.

Criticisms and Limitations of Perverse Incentives

Perverse incentives are a powerful concept, but they have limitations. Not every incentive backfires. Some incentives work as intended.

The concept can be misused to avoid accountability. Some people use it to justify inaction. The solution is better design, not no incentives.

The concept is a heuristic, not a law. It is a guide, not a rule.

Three simple ways to apply the idea without turning it into a slogan.

When designing an incentive, ask: what behavior will this encourage? What is the unintended consequence?

Test your incentives before implementing them

Test your incentives before implementing them. Pilot programs can reveal perverse effects.

Be willing to change course

Be willing to change course. If an incentive is backfiring, admit it. Change it.

EXPLORE NEXT

The best next ideas to read after this one.

Quick answers to common questions.

What are perverse incentives in simple terms?

Rewards that encourage the wrong behavior. People respond to incentives. If the incentive is misaligned, the behavior will be misaligned.

What is an example of a perverse incentive?

A company rewards employees for call volume. They rush calls. Customer satisfaction drops. The incentive backfired.

How do you avoid perverse incentives?

Design incentives carefully. Ask: what behavior will this encourage? Test your incentives before implementing them.

Why are perverse incentives a problem?

They lead to unintended consequences. The solution makes the problem worse. The incentive backfires.