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The thing that perverse incentives do ? January 13, 2007

Posted by Sharath Rao in America, economics, life.

Very interesting article about what perverse incentives do, in this case to the Manhattan traffic.

Still, it seems unusual that more than a third of all government workers drive into the city, an even higher percentage than construction workers. So why is that ? According to the article, the government workers have a very simple and powerful incentive: “because they have free parking.”

Now one might imagine that this parking is not really free – since the land itself is mostly owned by the government, it doesnt cost the government a thing. But if it were indeed land that the government rented from private individuals, then the government is using your money to worsen the traffic situation by subsidizing parking for a handful of its employees ( by no means the poorest of the society ). Vulgar, isnt it ?

What if they instead chose to pay the employees an extra $100 a month, most employees would take the public transport because spending $100 a month on parking would seem preposterous when most of the neighbourhood is taking the subway. The extra money would most likely be put to better use and also in the process improving the traffic situation.

Ofcourse, one would have to look at all the details in the current case. But I dont consider the above to be so sweeping a generalization since we know that we all respond to incentives ( and disincentives). Just to remind you, incentives can be of moral/social nature – not merely monetary. Sometimes ofcourse these are conflicting. To set up a trap – there is a strong social disincentive against say throwing garbage in broad daylight on a crowded street – you wouldnt think of doing it. If you were offered a ten thousand dollars for doing that, you wouldn’t think twice. That monetary incentive can be put to good social use like this :

Pitt confirmed that their newly-born daughter will have a Namibian passport while speaking to local journalists. Jolie decided to offer the first pictures of Shiloh through the distributor Getty Images herself, rather than allowing paparazzi to make these extremely valuable snapshots. People paid more than $4.1 million for the North American rights, while British magazine Hello! obtained the international rights for roughly $3.5 million; the total rights sale earned up to $10 million worldwide – the most expensive celebrity image of all time. All profits were donated to an undisclosed charity by Jolie and Pitt.

Yeah, we all respond to incentives – drivers, criminals, taxpayers, parents, journalists, none spared.



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