Adverse Incentives Research Articles

The Mercurial Commitment: Revisiting the Unintended Consequences of Military Humanitarian Intervention and Anti-Atrocity Norms

Abstract The debate on whether military humanitarian intervention and anti-atrocity norms, such as the responsibility to protect, cause perverse incentives, and provocative violence by a rebel group, has yet to reach a consensus. Specifically, existing theories are unable to fully explain why “emboldened” rebel groups provoke the government in some cases but not others. This paper reconciles this unresolved debate by arguing that it is not anti-atrocity norms but the temporary feasibility of humanitarian intervention that induces the potential rebel group to actually provoke the government. The inherent temporariness of the feasibility of large-scale intervention causes a commitment problem: An expectation of a temporary intervention shifts the balance of power toward a potential rebel and opens a quickly closing window of opportunity. A three-player game shows that, among other findings, a higher probability of humanitarian intervention alleviates the potential rebel’s incentive to fight, implying that the criticism of anti-atrocity norms is a “false charge.” The model also (i) explains why weaker groups can rebel in the shadow of external intervention and (ii) presents a novel implication that lowering the intervention cost can exacerbate the adverse incentive when a domestic commitment problem caused by the consolidation of government power is not severe.

Assessing Fiscal Sustainability: A Comprehensive Analysis of Brazil's Continuous Cash Benefit (BPC) Program

This paper analyzes the Brazilian social benefit known as Continuous Cash Benefit Programme (BPC), considering its rules, resource utilization, potential impacts,and adverse effects on society. The literature review was based on the Austrian Theory of Economic Intervention.We observed that the BPC needs to be reassessed regarding values, long-term sustainability, and control of adverse effects. Results showed that the value of the BPC per capita is higher than the value of other social benefits in Brazil. 37% of the budget for the analyzed social programs is allocated to the BPC, but it reaches only 18% of the total number of beneficiaries. The benefit amount is also higher than the nominal per capita household income of more than 40% of the Brazilian Federal Units. Since the BPC amount is tied to the minimum wage, which historically experiences real increases in value, and Brazilian data indicate a process of population aging, we expect that expenditures on the benefit will significantly rise in the coming decades. Additionally, we have observed that the BPC creates an adverse incentive for a portion of the population not to contribute to the country's social security system, as they anticipate fitting into the BPC's rules upon retirement. For the sake of public expenditure efficiency and fiscal sustainability, the value and rules of the BPC should be reviewed.

Contest Schemes and Dynamic Incentive Provision

Simple contest schemes, which tend to use extreme contemporaneous peer benchmarking, are generally thought to be less efficient at motivating productive and cooperative effort than explicit bonus contracts that optimally weight observed own and peer outputs. We show, however, that contest schemes can outperform explicit bonus contracts in a two-period dynamic setting if periodic output is correlated over time, and contract terms can be renegotiated. In our model, all parties update their beliefs about ex ante unknown time-invariant noise upon observing first-period outputs, and second-period wage offers are updated accordingly. This creates first-period shirking incentives for the agents. We show that relative to bonus contracts, the extreme contemporaneous peer benchmarking in contest schemes can weaken or even eliminate the adverse incentives created by prior-period benchmarking, even though the available information and the learning process are the same under both schemes. This dynamic advantage allows contest schemes to outperform repeated bonus contracts for a wide range of parameter values, despite imposing higher static efficiency losses in each period. If competing agents are assigned to sufficiently similar tasks, a contest scheme’s ability to sever the statistical link between periods can yield not only higher early productive effort compared with bonus contracts, but also less uncooperative behavior, despite putting the agents in a more contest-like situation. This paper was accepted by Brian Bushee, accounting. Supplemental Material: The online appendices are available at https://doi.org/10.1287/mnsc.2022.00035 .

Financial markets as a public good

Aim: In this paper, it is argued that in complex financial systems private goods, important for the creation of a market, have to be considered in a multiple of differing property rights structures necessary for the functioning of the system. This may lead to high transaction costs and adverse incentives for different players, threatening the sustainability of the system. The aim of the article is to create and explore a framework for assessing fragilities and threats to the sustainability of financial markets, using a property rights approach. This may be a useful background for development of policy to increase the sustainability of financial markets. Conclusions/findings: It is argued that while financial services have features of a private good for which markets exist, the infrastructure and organizational structures have features of a club good. These are characterized by problems of congestion and depreciation due to its overuse. The question is addressed to what extent the public good features are of the “weakest-link” kind, where fragilities may lead a potential collapse. Implications of the research: The complex financial system should be prevented from getting too many features of an open access regime, while making it a self-strengthening system where failures have learning effects. This may require the increase of different types of buffers and limits to the size of the players in the financial system. Otherwise, any action that is thought to lead to an improvement, is likely to lead to have the opposite effect. Keywords: financial markets, complexity, public goods, club goods, property rights, sustainability JEL: D23, E42, G1, G2,

Estimating Relative Tax Efficiency for Selected States in India: An Error Correction Approach

We estimate state-level tax efficiency in India using an error correction framework, making a distinction between a long-term cointegrating relationship and a short-term dynamics around it. We use a stochastic frontier approach in a panel data framework considering 17 medium and large (ML) states for the period 2004–2005 to 2019–2020. We find that the FC14’s initiative to sharply increase the states’ share in the divisible pool of central taxes had an adverse impact on states’ own tax revenues. The short-term relationship converges to the long-term relationship in 2.6 years. In terms of relative tax effort, the most efficient state was Tamil Nadu, while the least efficient was Bihar. Results from this study would be useful in averting the problem of adverse incentives, while determining the intergovernmental transfers. In the post-GST scenario, operating at their tax efficiency frontier would be critical for states especially in the light of discontinuation of the GST compensation cess.

Evaluation of a new antiresistic strategy to manage antibiotic resistance

Systemic strategies for combating antimicrobial resistance (AMR) currently focus on limiting antibiotic use and have been generally insufficient in preventing the rise of AMR. Additionally, they often generate other adverse incentives, such as discouraging pharmaceutical companies from investing in research and development of new antibiotics, further exacerbating the problem. This paper proposes a novel systemic strategy for tackling AMR, which we term 'antiresistics': any intervention (whether a small molecule, genetic element, phage, or whole organism) that reduces resistance rates in pathogen populations. A prime example of an antiresistic would be a small molecule that specifically disrupts the maintenance of antibiotic resistance plasmids. Of note, an antiresistic would be expected to have a population-level effect and not necessarily be useful on a time scale relevant to individual patients. We developed a mathematical model to assess the effect of antiresistics on population resistance levels and calibrated it to longitudinal data available at the country level. We also estimated potential effects on idealised rates for the introduction of new antibiotics. The model shows that greater use of antiresistics allows for greater usage of existing antibiotics. This leads to an ability to maintain a constant overall rate of antibiotic efficacy with a slower rate of developing new antibiotics; subsequently, antiresistics have a positive benefit on the effective lifetime and thus profitability of antibiotics. By directly reducing resistance rates, antiresistics can provide clear qualitative benefits (which may be quantitatively large) in terms of existing antibiotic efficacy, longevity, and alignment of incentives.

Collective Action and Intra-group Conflict with Fixed Budgets

ABSTRACT We study collective action under adverse incentives: each member of the group has a given budget (‘use-it-or-lose-it’) that is private information and can be used for contributions to make the group win a prize and for internal fights over this very prize. Even in the face of such rivalry in resource use, the group often succeeds in overcoming the collective action problem in the non-cooperative equilibrium. In one type of equilibrium, all group members jointly contribute; in the other type of equilibrium, volunteers make full standalone contributions. Both types of equilibrium exist for larger and partially overlapping parameter ranges.

The Ratchet Effect: Theory and Empirical Evidence

Using current performance to set future targets can discourage effort and reduce performance. Our study examines whether this ratchet effect also undermines incentives of high-level managers and executives. We use a dynamic model to show that empirical tests used in prior literature can falsely reject the null hypothesis of no ratchet effect. We also motivate a new test that can better detect the adverse incentives effects of target setting. Specifically, we show that the ratchet effect can be identified as the effect of past performance on changes in perceived target difficulty. We use panel data from nine annual 2011–2019 surveys to implement this test. Similar to prior studies, we find strong evidence that targets are revised upward following good performance. Nevertheless, we reject the ratchet effect hypothesis because we further find that good performance in one period is associated with a decrease in perceived target difficulty in the next period. This finding is more pronounced in settings where well-performing managers have more private information about future performance and where long-term commitments are more credible. This paper was accepted by Suraj Srinivasan, accounting. Supplemental Material: The data files and online appendices are available at https://doi.org/10.1287/mnsc.2022.4641 .

Who's Greenwashing Via the Media and What are the Consequences? Evidence From China

We show that those Chinese listed companies that are riding high on the media corporate social responsibility (CSR) ranking lists tend to have greater advertising (sales) expenses and poor environmental performance. This observation suggests that some companies opportunistically use media to greenwash their image, hoping to capture economic rents. Indeed, our evidence shows that greenwashing firms benefit in the lending market by exploiting the media to gain a kind of environmental, social, and governance (ESG) endorsement, thereby allowing them to achieve a lower cost of debt and to experience lower collateral obligations. The evidence suggests an adverse incentive to exploit ESG awareness via media coverage in weak institutional environments and opaque ESG disclosure regimes.

Mining and socio-ecological systems: A systematic review of Sub-Saharan Africa

This study adapted a socio-ecological framework to review Drivers of mining Activities, the environmental Pressures, the State of changes, their Impacts on human Welfare, and the management Response as Measures (DAPSI(W)R(M)) to mining activities. Systematic literature review was employed in data collection. The mining activities lead to environmental pressures, such as forest degradation, and wastewater. State changes of the environment as a result of pressures generated by mining activities were changes in land cover and habitat degradation leading to biodiversity loss, air, water and soil pollution. As a result of the state changes in the environment, the livelihood strategies of communities have been affected. Sub-Saharan African countries have implemented legal and policy framework as measures to overcome adverse effects of mining on the social systems. However, there is still a need for effective formulation and implementation of policies, legislation, plans, and strategies for the sustainable mining and rural development. These will be far-reaching in addressing application and mal-practices in mining sector such as corruption, limited meaningful participation of host communities, non-adherence to social and environmental standards, adverse incentives in inadequate local policies and accountability systems, transfer pricing, tax evasion and under-valuation of assets.

Do national policies for complaint handling in English hospitals support quality improvement? Lessons from a case study.

A range of public inquiries in the English National Health Service have indicated repeating failings in complaint handling, and patients are often left dissatisfied. The complex, bureaucratic nature of complaints systems is often cited as an obstacle to meaningful investigation and learning, but a detailed examination of how such bureaucratic rules, regulations, and infrastructure shape complaint handling, and where change is most needed, remains relatively unexplored. We sought to examine how national policies structure local practices of complaint handling, how they are understood by those responsible for enacting them, and if there are any discrepancies between policies-as-intended and their reality in local practice. Case study involving staff interviews and documentary analysis. A large acute and multi-site NHS Trust in England. Clinical, managerial, complaints, and patient advocacy staff involved in complaint handling at the participating NHS Trust (n=20). Not applicable. Findings illustrate four areas of practice where national policies and regulations can have adverse consequences within local practices, and partly function to undermine an improvement-focused approach to complaints. These include muddled routes for raising formal complaints, investigative procedures structured to scrutinize the 'validity' of complaints, futile data collection systems, and adverse incentives and workarounds resulting from bureaucratic performance targets. This study demonstrates how national policies and regulations for complaint handling can impede, rather than promote, quality improvement in local settings. Accordingly, we propose a number of necessary reforms, including patient involvement in complaints investigations, the establishment of independent investigation bodies, and more meaningful data analysis strategies to uncover and address systemic causes behind recurring complaints.

A Case-Study on State-Owned Firms Agency Costs. A Call for More Effective Governance and Board Independence

This paper performs a case study analysis of a deal (snowball swap) conducted by a state-owned transportation firm in Portugal. This deal lowered immediately the financing costs by 3 percentage points in the first 2 years and then it would cost an additive spread (snowball) if the Euribor interest rate crossed the barrier of 2% to 6%. The Euribor interest rate dropped to levels well below 2% and these contracts, which had a notional value of 80 million euros, had a cost of around 700 million euros. From the analysis of the contours of this business, it is possible to conclude that the corporate governance model of state-owned companies does not prevent situations of lack of independence of managers from the political power and this leads to a very short-term vision of these managers and creates adverse incentives for these managers. The paper concludes with a discussion of this case study implications for public policy on state-owned firms’ governance.

A Well-Designed Implement for Promoting Population Health and Property via Insurance.

The frequency and intensity of catastrophes (including natural disasters and pandemics) rise and damage the population's health, life and property more seriously. In order to protect population health and wealth via full insurance indemnity, many countries set up a public catastrophe insurance scheme (PCIS) to maintain the function of catastrophe insurance markets. Little literature discusses the smart payment way of contributions charged by PCIS. This article design a model to describe the upward trend and cyclic frequency and intensity of catastrophic events. Such characteristics also promote the business cycle of the insurance industry. We analyze the changes in catastrophic insurer's capital structures under three cases of that the volume-based charges to the PCIS may come from equity holders or policyholders or both. PCIS may entail a shift of equity capital toward minimum solvency requirements, and then adverse incentives regarding insurer's security level arise. Various numerical experiments illustrate the changes in equity position, default probabilities, or expected policyholder deficits. The results show that the payment way of contributions should be designed carefully, not only with regard to PCIS's finance balance but also the resultant incentives and effects.

National Health Insurance Program financing during the COVID-19 pandemic: financial viability and

This paper examines the state of National Health Insurance Program (NHIP) financing during the COVID-19 pandemic in the Philippines, an event which coincides with the implementation of the Universal Health Care (UHC) mandates on restructuring the NHIP premium schedule, providing immediate eligibility to NHIP benefits, and expanding member benefits. Using the ratio of total expenditures to total revenues as the measure of financial viability, it shows that the NHIP remains financially viable during the COVID-19 pandemic year of 2020. Projections for 2021 however show that NHIP financial viability may be adversely affected by the significantly higher number of COVID-19 cases with the negative effect mitigated only if COVID-19 benefit claim patterns remain as weak as observed for 2020. On the revenue side, the potential for a lower premium is observed to be offset by the higher rates in the UHC mandated premium schedule. On the expenditure side, potential increases associated with the implementation of immediate eligibility and the introduction of COVID-19 benefits are mitigated by lower NHIP benefit utilization due to reduced mobility and access to health facilities. Secondary analysis on who has to bear the burden of paying for NHIP benefits, however, shows that the implementation of UHC financing initiatives may heighten adverse incentives on members’ willingness to pay premiums. Using the benefit expenditure-premium contribution ratio as the measure for the burden of paying for NHIP benefits, it is shown that the Formal Economy sector shoulders the burden of funding the NHIP benefits of the Informal Economy and Sponsored sectors.

Taming the few: Platform regulation, independent audits, and the risks of capture created by the DMA and DSA

In its attempt to better regulate the platform economy, the European Commission recently proposed a Digital Markets Act (DMA) and a Digital Services Act (DSA). While the DMA addresses worries about digital markets not functioning properly, the DSA is concerned with societal harms stemming from the dissemination of (illegal) content on platforms. Both proposals focus on the relative size of platforms. The DMA applies to ‘gatekeeper’ platforms and the DSA has a special regime of scrutiny for ‘very large online platforms’ (VLOPs). Focusing on size, however, can have negative consequences for the enforcement of the DSA: First, risks disseminated by platforms below the VLOP-threshold reside in a regulatory blind spot. Second, VLOPs may leverage their market power against their new mandatory auditors and risk assessors, a threat theorised as ‘audit capture’ in this article. As a result, societal risks may remain undiscovered or downplayed and consumers and citizens may be harmed. This article traces the origin of the size criteria in the legislative history of the DMA and DSA proposals. It argues for safeguards against audit capture and adverse incentive structures in the DSA. The article draws on the debate on audit reform in the aftermath of the global financial crisis of 2007–2008 to provide blueprints for fixing the regulatory gap.

Political economy of renewable resource federalism.

The authority to manage natural capital often follows political boundaries rather than ecological. This mismatch can lead to unsustainable outcomes, as spillovers from one management area to the next may create adverse incentives for local decision making, even within a single country. At the same time, one-size-fits-all approaches of federal (centralized) authority can fail to respond to state (decentralized) heterogeneity and can result in inefficient economic or detrimental ecological outcomes. Here we utilize a spatially explicit coupled natural-human system model of a fishery to illuminate trade-offs posed by the choice between federal vs. state control of renewable resources. We solve for the dynamics of fishing effort and fish stocks that result from different approaches to federal management that vary in terms of flexibility. Adapting numerical methods from engineering, we also solve for the open-loop Nash equilibrium characterizing state management outcomes, where each state anticipates and responds to the choices of the others. We consider traditional federalism questions (state vs. federal management) as well as more contemporary questions about the economic and ecological impacts of shifting regulatory authority from one level to another. The key mechanisms behind the trade-offs include whether differences in local conditions are driven by biological or economic mechanisms; degree of flexibility embedded in the federal management; the spatial and temporal distribution of economic returns across states; and the status-quo management type. While simple rules-of-thumb are elusive, our analysis reveals the complex political economy dimensions of renewable resource federalism.

Collective Action and Intra-group Conflict with Fixed Budgets

We study collective action under adverse incentives: each member of the group has a given budget ('use-it-or-lose-it') that is his private information and that can be used for contributions to make the group win a prize and for internal fights about this very prize. Even in the face of such rivalry in resource use, the group often succeeds to overcome the collective action problem in non-cooperative equilibrium. One type of equilibrium has group members who both contribute, the other type has volunteers who make full stand-alone contributions. Both types of equilibrium exist for larger and partially overlapping parameter ranges.

Caught in the Crossfire: Challenges to Migrant Protection in the Yemeni and Libyan Conflicts

In spite of the prevailing security dynamics in Yemen and Libya, both states continue to serve as areas of transit along some of the world’s largest mixed migration routes, leaving migrants caught in the crossfire of the two conflicts. This article examines the legal framework governing the protection of migrants in armed conflict under international humanitarian and human rights law. It also identifies two adverse incentives produced by the conflict situations that impede the exercise of these legal protections: (1) profits derived from migrant smuggling and trafficking, and (2) the use of migrants to support armed groups. In the absence of stable conditions in Yemen and Libya, individuals have little reason to respect international legal protections and discontinue migrant abuse connected with the lucrative businesses of smuggling and trafficking. The intractable nature of the two conflicts has also led to the strategic use of migrants as armed support, and more specifically as combatants, weapons transports, and human shields. Given these realities, the article outlines several recommendations to address the issue of migrant abuse in conflict. It recommends that states, particularly those neighboring Yemen and Libya, strengthen regular migration pathways to help reduce the number of migrants transiting through active conflict zones. It further advises that the international community increase the cost of noncompliance to international humanitarian law through the use of accountability mechanisms and through strategic measures, including grants of reciprocal respect to armed groups that observe protections accorded to migrants in conflict situations.

Academic incentives for enhancing faculty engagement with decision-makers\u2014considerations and recommendations from one School of Public Health

In academia, faculty are bound by three pillars of scholarship: Teaching, Research and Service. Academic promotion and tenure depend on metrics of assessment for these three pillars. However, what is and is not acceptable as “service” is often nebulous and left to the discretion of internal committees. With evolving requirements by funders to demonstrate wider impacts of research, we were keen to understand the financial and non-financial incentives for academic faculty to engage in knowledge translation and research utilization. Between November 2017–February 2018, 52 faculty from one School of Public Health (SPH) were interviewed. Data was analyzed using Atlas.Ti and furthermore with framework analysis. The appeal of incentives varied according to personal values, previous experiences, relevance of research to decision-making, individual capacities, and comfort ranging from instinctive support to reflexive resistance. Discussions around types of incentives elicited a plethora of ideas within 4 different categories: (a) Monetary Support, (b) Professional Recognition, (c) Academic Promotion, and (d) Capacity Enhancement. However, concerns included adverse incentives, disadvantaging suboptimally-equipped faculty, risk of existing efforts going unnoticed, vaguely defined evaluation metrics, and the impacts on promotion given that engagement activities often occur outside of the traditional grant cycle. With a shift in funder requests to demonstrate greater social return on their research investments, as well as renewed global attention to research, science and evidence for decision making, SPHs such as this one, are likely going to be concerned about the implications of an enhanced “service” pillar on the other two pillars: teaching and research. The role of incentives in enhancing academic engagement with policy and practice is therefore neither simple nor universally ideal. A tempered approach that considers the various professional aspirations of faculty, the capacities required, organisational culture of values around specific discovery sciences, funder conditions, as well as alignment with the institution’s mission is critical. Deliberations on incentives leads to a larger debate on how to we shift the culture of academia beyond incentives for individuals who are engagement-inclined to institutions that are engagement-ready, without imposing on or penalizing faculty who are choice-disengaged.

Very high and low residual spenders in private health insurance markets: Germany, The Netherlands and the U.S. Marketplaces

We study the extremely high and low residual spenders in individual health insurance markets in three countries. A high (low) residual spender is someone for whom the residual—spending less payment (from premiums and risk adjustment)—is high (low), indicating that the person is highly underpaid (overpaid). We begin with descriptive analysis of the top and bottom 1% and 0.1% of residuals building to address the question of the degree of persistence in membership at the extremes. Common findings emerge among the countries. First, the diseases found among those with the highest residual spending are also disproportionately found among those with the lowest residual spending. Second, those at the top of the residual spending distribution (where spending exceeds payments the most) account for a massively high share of the unexplained variance in the predictions from the risk adjustment model. Third, in terms of persistence, we find that membership in the extremes of the residual spending distribution is highly persistent, raising concerns about selection-related incentives targeting these individuals. As our results show, the one-in-a-thousand people (on both sides of the residual distribution) play an outsized role in creating adverse incentives associated with health plan payment systems. In response to the observed importance of the extremes of the residual spending distribution, we propose an innovative combination of risk-pooling and reinsurance targeting the predictively undercompensated group. In all three countries, this form of risk sharing substantially improves the overall fit of payments to spending. Perhaps surprisingly, by reducing the burden on diagnostic indicators to predict high payments, our proposed risk sharing policy reduces the gap between payments and spending not only for the most undercompensated individuals but also for the most overcompensated people.