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Wesley ShuThey are designed to reduce perverse incentives.
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A perverse incentive is an incentive that has an unintended and undesirable effect, that is against the interest of the incentive makers.
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In Hanoi, under French colonial rule, a program paying people a bounty for each rat pelt handed in was intended to exterminate rats. Instead it led to the farming of rats
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Funding fire departments by the number of fire calls made is intended to reward the fire departments that do the most work. However, it may discourage them from fire-prevention activities, which reduce the number of fires.
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The U.S. Endangered Species Act imposes land-use restrictions without compensation on people who have endangered or threatened species on their property. The intention is to protect at-risk species, but in practice this causes landowners to make their land unsuitable for the protected species, so the species will go elsewhere, and the government will leave them alone. This can cause more harm to species than if the ESA did not exist.
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In Hanoi, under French colonial rule, a program paying people a bounty for each rat pelt handed in was intended to exterminate rats. Instead it led to the farming of rats.
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