Learning Objectives Explain how incentives affect individual behavior Explain how poorly designed incentives can have perverted results RG 3034 How does the black rhino illustrate the importance of incentives ID: 314814
Download Presentation The PPT/PDF document "Incentives" is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.
Slide1
IncentivesSlide2
Learning Objectives
Explain how incentives affect individual behavior
Explain how poorly designed incentives can have perverted results
Slide3Slide4
RG 30-34
How does the black rhino illustrate the importance of incentives? Slide5
Incentives
Incentives are what motivates an individual or group to behave in a certain way or perform a certain
action
In a market economy prices are
often the most important incentive Slide6
Incentives
Why do people kill black rhinos?
Because they can make a lot of money relative to getting caught
People weigh benefits versus costs
Maximize their Personal UtilitySlide7
Incentives and Productivity
“In any system that does not rely on markets, personal incentives are usually divorced from productivity. Firms and workers are not rewarded for innovation and hard work, nor are they punished for sloth and inefficiency.”
Examples?Slide8
Perverse Incentives
What are some examples of “perverse incentives?”
Slide9
Examples
Lawyers bill by the hour rather than get paid for any reasonable metric that measures the quality and efficiency of their work
Providing
CEO-level employees with bonuses for reporting higher earnings encourages executives to artificially inflate earnings statements and make decisions targeting short term gains at the expense of long term profitability
.
Doctors are financially incentivized to order more procedures rather than encourage preventionSlide10
Perverse Incentives
Perverse Incentive
:
an
incentive
that has an unintended and undesirable result which is contrary to the interests of the
incentive
makers.Slide11
Perverse Incentive Examples
In Hanoi, under French colonial rule, a program paying people a bounty for each rat tail handed in was intended to exterminate rats. The Rat population increased
When a day care put a small late fee on late parents late pick ups increased
Several states have enacted laws requiring judges to impose tough sentences for a third felony conviction. The result? An increase in the murder rate.Slide12
Describe how London reduced its congestion. Slide13
RG Question
What is the principal-agent problem? Slide14
Principle- Agent Problem
When the interests of one person making decisions on behalf of a another person (principle) do not align with that person
The two parties have:
Different interests
Asymmetric informationSlide15
Prisoner Dilemma
A paradox
in
which two individuals acting in their own best interest pursue a course of action that does not result in the ideal outcome
.
both
parties choose to protect themselves at the expense of the other participant.
By Trying to maximize their individual utility both
participants find themselves in a worse state than if they had
cooperatedSlide16
How does the fishing industry reflect the prisoner’s dilemma? Slide17
What is creative destruction?Slide18
Creative destruction
A term coined by
Joseph Schumpeter
in his work entitled "Capitalism,
Socialism
and Democracy" (1942) to denote a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one
."Slide19
Why is it difficult to transfer money from the rich to the poor? Think about aligning incentives. (49-51)