Perverse incentives

One of the big problems in management or in legislation is that of creating proper incentives. Coyote Blog illustrates this in Follow the Incentives.

I often tell people that in failing organizations like the government or GM, most of the folks who are “part of the problem” aren’t bad people, they just have bad incentives.

The case at hand is a health bill that penalizes doctors if they show up in the wrong place in the cost distribution curve. Yes, it sounds good to trim those who end up on the high cost end of the curve. The problem is that you don’t know why they ended up there. The assumption is that a doctor who is responsible for too much billing is over-charging and not that he is more involved in difficult cases or working in an expensive environment.

The key in this case is to properly define the desired outcome. Inexpensive health care has two desired outcomes that conflict with each other. It is easy to go after one or the other and that is the source of such ideas as in the Coyote’s example. What is difficult is to find incentives that work towards both outcomes. The only effective way to do that found to date is the open market of competing ideas. It is a capitalistic economic philosophy that has worked best, to date, in encouraging many people to create new ideas and try them in the market to see how they work and how they compare to other ideas in meeting the desired goals. One of the keys in this open market approach is that the desired outcomes do not all need to be explicit nor do their relative merits need to be defined beforehand. The success of what works and how it changes over time takes care of that.

Comments are closed.