Perverse Incentive Follow-up

In earlier articles (see Perverse Incentives – Part 1 and Part 2,  and Unintended and Perverse Outcomes) I discussed the importance of checking the Performance Management Framework (PMF) within your Performance Based Contract (PBC) to watch for perverse incentives.  Those incentives, either positive or negative, that have an unintended and undesirable result which are contrary to the original intent.  In the case of a PBC, the interest of the buyer.

One of the case studies I used was the widespread practice of Victorian Police officers falsifying over 258,000 roadside alcohol breath tests over 5½ years (about 1.5% of all tests carried out during that time) by inflating breath test bags themselves to meet quotas noting there were no financial incentive for officers to fake tests.  For those not familiar with the Victorian Police force, they are a state level police force for 1 of the 7 state / territories in Australia noting there are only state and federal police forces in Australia with the state of Victoria having a population of 6.5 million in 2018 and an area of 227,436 km², which is sightly smaller than the area of the United Kingdom.

The Victoria Police conducted an independent investigation into the falsification of preliminary breath tests (PBTs) by their officers, called Taskforce Deliver, led by former Chief Commissioner Neil Comrie AO APM.  In the Taskforce Deliver report the taskforce found that the falsification of breath tests was widespread but fortunately may have occurred at much lower rates than first estimated by Victoria Police.  From a PBC perspective there are some interesting observations that equally apply to designing a PMF.  These are as follows:

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Importantly, many of the aspects highlighted in the report are common pitfalls when establishing a PBC.  These are:

  • Using quantitative performance measures due to their apparent simplicity and objectiveness in application (i.e. gathering, reporting and analysing) when qualitative performance measures should have been considered.
  • Applying performance measures without the enabling ‘infrastructure’ such as training, governance and IT to support operating the measures.
  • Not understanding / linking the Required Performance Level to a high-level outcome, including testing whether the performance level was achievable with current resources.
  • Using only a single performance measure to measure success (or otherwise) of a complex multi-dimensional activity (see The Allure of a Single Measure).

In summary, some of the issues raised in the Taskforce Deliver report could have been avoided, or at least minimised, through a better practice approach to applying performance measures to nudge behaviour.  While much of this better practice is covered in this blog and my book, Mastering Performance Based Contracting, over the next couple of months we will look at better practice performance measure selection and design.

This entry was posted in Behavioural Economics, Book, Case Study, Incentives, Nudging, perverse incentives, the How, Uncategorized and tagged , , , , , , , , , . Bookmark the permalink.

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