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Aperverse incentive is an incentive that has an unintended and undesirable result that is contrary to the intentions of its designers. The cobra effect is the most direct kind of perverse incentive, typically because the incentive unintentionally rewards people for making the issue worse.[1][2] The term is used to illustrate how incorrect stimulation in economics and politics can cause unintended consequences.
The term cobra effect was coined by economist Horst Siebert based on an anecdotal occurrence in India during British rule.[2][3] The British government, concerned about the number of venomous cobrasinDelhi, offered a bounty for every dead cobra. Initially, this was a successful strategy; large numbers of snakes were killed for the reward. Eventually, however, people began to breed cobras for the income. When the government became aware of this, the reward program was scrapped. When cobra breeders set their snakes free, the wild cobra population further increased.[4] This story is often cited as an example of Goodhart's laworCampbell's law.[5]
As an incentive to preserve historical buildings, governments may designate older structures as historical properties; such classification may prevent or impede further sale or alteration of the property. Any compensation offered may be significantly less than normal commercial returns on properties or land.[citation needed] Examples related to this type of perverse incentive include:
Inhis autobiography, Mark Twain says that his wife, Olivia Langdon Clemens, had a similar experience:[41]
Once in Hartford the flies were so numerous for a time, and so troublesome, that Mrs. Clemens conceived the idea of paying George a bounty on all the flies he might kill. The children saw an opportunity here for the acquisition of sudden wealth. ... Any Government could have told her that the best way to increase wolves in America, rabbits in Australia, and snakes in India, is to pay a bounty on their scalps. Then every patriot goes to raising them.