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Wed Dec 12, 2012, 10:44 AM

Getting the incentives wrong

By Tom Toles
Those conservatives who actually care about something other than their own bottom line like to talk about how the marketplace gets incentives right, not only for economic outcomes, but for human behavior too.

Itís a good argument, but I want to look at the second half of it today. The idea that if things are arranged so that you get more benefits if you do something useful is a really good idea, as far as it goes. But hereís where it starts failing. It starts failing in a winner-take-all economy, which we seem hell-bent on creating. Itís the idea of carrot and stick, at least the carrot part. You make some effort to grab the carrot when there is some hope of getting it, and you try for the next carrot when you are successful at grabbing the first carrot. Only the mule in a cartoon keeps walking towards a carrot that is forever suspended out of its reach.

Two lessons. First, the rich should spend less time congratulating themselves on how hard they work. Itís a WHOLE lot more rewarding to work long hours for $10,000,000 dollars a year, than for raw carrots. Secondly, people DO respond logically to incentives. If the incentives are set up to require a preposterous amount of effort for a tiny or tenuous payoff, expect increasing numbers of people to opt out of that bargain. If your fallback position is if they get desperate enough, they will do ANYTHING to avoid starving, you may be correct, and you may also be a monster.

http://www.washingtonpost.com/blogs/tom-toles/post/getting-the-incentives-wrong/2012/12/10/77da1932-42fa-11e2-8e70-e1993528222d_blog.html

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Reply Getting the incentives wrong (Original post)
n2doc Dec 2012 OP
phantom power Dec 2012 #1

Response to n2doc (Original post)

Wed Dec 12, 2012, 11:05 AM

1. there are so many ways that pure-market incentives go wrong...

They fail to capture almost all long-term cost/benefit trade subspaces. They fail whenever choosing between options requires too much expertise for a person to acquire. They fail when there is too much time pressure to make a decision. They fail when there is no practical way to provide meaningful options (there are not two road systems to choose from, and there never will be).

Conservatives love to talk about 'economics 101', in which case I assume that economics 101 is not covering all the necessary conditions for a market system to yield any kind of optimal outcome.

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