Using incentives to solve problems

[DoubleX 5]

This topic aims to incite you to think about how incentive can be used to solve problems :)

 

Let's begin by citing this video from Extra Credits:

The Power Of Incentives - How Games Help Us Examine Our World

 

Now my focus will be on the cobra example(1:09 - 1:35). Wikipedia has an article named Cobra effect specifically about this.

(On a side note: In this cobra example, the government might want to just hire people with excellent salaries to work under it to reduce the number of cobras lol)

 

Original Setup

 

 

If we've thought carefully about the essence of the above problem, it actually involves the following points:

1.Problem X needs to be solved by entity A but not entity B

2. Entity A uses rewards to incentivize entity B to solve problem X for itself

3. The rewards are solely based on how much entity B has acted on problem X that can make it better

It means that:

1. Entity B wants to get as many rewards from entity A as it can

2. Entity B wants to act on problem X(that can make it better) as much as it can

3. Problem X needs to persist on a significant level in order for entity B to be able to keep acting on problem X

So if the following also hold:

1. Entity B is able to make problem X worse

2. The cost of making problem X worse by entity B can be outweighed by the rewards of acting on problem X given to it and the cost of getting problem X solved respectively

3. Entity B can act on all parts of problem X created by it(so no other Entities can take any reward for solving any of those parts in which Entity B has invested costs on)

Then the above setup is sufficient for the Cobra effect to take place.

 

The above irony stems from these 2 seemingly consistent yet actually conflicting incentives:

1. Rewards for getting problem X solved

2. Rewards for acting on problem X that can make it better

It's because 1 leads to reducing the seriousness of problem X, and eventually lead to it being completely solved, while 2 leads to keeping the seriousness of problem X from being trivial, in order to keep being able to act on it to keep getting rewards.

 

This might lead to you thinking that 2 should be completely replaced by 1, yet this will lead to some other problems.

Going back to the cobra example, if the government changed the policy into this:

"If the number of cobras reduces to amount X after 1 year, all citizens will take reward Y"

Then it will lead to many of those actively acting on the cobra issue think, "Why those not trying to act on the cobra issue at all can get the exact same reward as I?"

This, as proven by the history, can lead to most of them give up on continuing to act on the cobra issue and hope that someone else will do that for them.

 

 

 

Alternative Setup

 

 

Therefore, I think that a more effective and efficient incentive should be based on both 1 and 2.

Using the cobra example again, the government can setup the following:

1. If the number of cobras reduces to amount X after 1 year, there will be an reward pool Y.

2. The less number of cobras(as long as it's below X), the larger the reward pool Y.

3. The amount of the reward pool Y is capped at Z.

4. The minimum share for those actively acting on the cobra issue is W.

5. The more one actively acting on the cobra issue, the larger share, which is capped at T, one can take, as long as 4 still holds.

6. Cobra skins coming from cobras bred by someone will be rejected by the government and the offenders will be blacklisted

 

Obviously, this setup won't lead to those actively acting on the cobra issue feeling unfair due to those not acting on it at all taking the exact same amount of rewards as them, as long as the value of W is properly set(They might still feel cheated by those breeding cobras, which will be explain below).

Now, the only reason for anyone to breed cobras will be to take a larger share of the reward pool Y, which is still based on the number of cobras reduced after 1 year.

It means that breeding too many cobras can actually make those breeding cobras lose, as doing so still have costs and can lead to the decreased amount of the reward pool Y.

This implies both the risk of cheating money from the government and the number of cobras being increased will become far smaller, more controllable and manageable.

At the very least, even if someone still breeds cobra in order to take a larger share, he/she still won't go overboard, meaning that the government won't have to abandon the setup completely. Instead, just blacklisting him/her and using the media against him/her can suffice.

Also, this setup can detect the seriousness of frauds very easily, just by comparing the number of cobras reduced after 1 year and that of the cobra skins received by the government during the year.

Finally, this setup is much more configurable albeit also much more complicated, as there are much more parameters to be tweaked in order for the setup to work properly.

 

Of course, this setup is still not really that ideal and is still quite vulnerable to this slightly extreme case:

1. Most people being able to breed cobras will think that many others will really reduce the number of cobras by a rather huge amount

2. They can just breed cobras and can still be able to take a large share of the reward pool Y without being caught by the government

3. The majority of those actively reducing the number of cobras feel cheated due to them taking less rewards than those breeding cobras

4. The aforementioned majority gives up on continuing to reduce the number of cobras

5. The entire setup fails due to not meeting its goal to have a reward pool Y

6. Those breeding cobras releases all the cobras they've bred, causing the number of cobras to be increased

Nevertheless, I still think that it'll work better than the original setup and the aforementioned case's much more extreme than the original one.

 

Another issue of this setup is that it has a somewhat limited application.

For instance, it won't work well on police fighting crimes.

It's because only police can know the true number of crimes, meaning that this setup would incentivize them to report a false crime number that's far lower than the true one, as it costs far less than actively changing the environments from breeding crimes.

But since reporting a false number alone won't work without them being less active on hunting crimes which will also reduce their costs(otherwise the liar would be too obvious), they would also be incentivized to hide those actual crimes from the public(which still costs less than addressing the root causes), or the sheer high number of incidences induced by crimes would discredit them.

This leads to many criminals thinking that they can commit more crimes with less chances being caught, which lead to the increased number of crimes.

So this setup won't work properly if the only entities knowing the true results of a setup are those taking rewards from that setup.

 

 

 

So what do you think about using incentives to solve problems? What's your solution on the cobra example? How will you apply incentives to solve problems? Let's share your 2 cents here :P

 

P.S.: There's probably no incentive system that will work everytime everywhere, instead it should be built specifically for the situation it's meant to be addressed and adapt accordingly as the situation changes.