Perverse Incentives

Businesses have incentives. Are they ever positive?

You are a pharmaceutical company. You can make a drug that can cure a disease that is potentially fatal, or deliver a drug that helps the patient manage the disease while remaining on the drug for decades. Which one do you develop?

You are a manufacturer. You can make a product that would have the durability to last over a decade, but cost 20% more or manufacture something that comes apart in two years and deliver greater sales. Which one do you make?

You run a university where intake is driven by ranking, and ranking is driven by the number of publications. Not on whether you stir the curiosity of a student. What do you aim for?

You run a hospital where your income depends on how long your patient stays at the hospital and how complicated their maladies are. Would you run unnecessary tests? Slow their convalescence?

You run a restaurant, you can use good ingredients and put pressure on your margin, or you could use cheaper ingredients and make more money. Would you buy better ingredients?

You make ice-creams. You can make a milk-based product that unfortunately melts quickly, resulting in several regional plants, or you could build a large central plant, which saves money and fill your product with chemicals that make transportation possible. How do you think ice cream is made?

You run an e-commerce firm, and you know that your income will rise if you squeeze your supplier and make them sell at incredibly low margins. Would you squeeze them?

I can go on, but you get the idea…

It is hard to understand something when your salary depends on not understanding it.

The only thing that capitalism delivers without fail is perverse incentives.