Perverse incentives — the broader, more rigorous term

A perverse incentive is an incentive that causes people to behave in a way that is contrary to the objective the incentive was intended to achieve.

For example:

Low-Bid Contracting (Cost-Cutting)

• Owners often pick the cheapest contractor to save money upfront.

• Contractors then cut corners on material quality or underbid the project just to win.

• They rely heavily on expensive change orders later to make a profit.

Time-Based or Hourly Management Fees

• Project managers or consultants paid by the hour earn more the longer a project takes.

• This creates an invisible push to drag out timelines, slow down approvals, or overcomplicate tasks. 

Rework and Overtime Pay

• Workers or fix-it crews are sometimes paid extra overtime to repair mistakes (punch-list items).

• This makes doing a sloppy job the first time more profitable for the crew than doing it right. 

Safety Metrics Tied to Disincentives

• Companies reward supervisors for having zero reported injuries on-site.

• Workers feel pressured to hide injuries or avoid reporting minor accidents to keep the safety record clean.

The important insight is that people don't necessarily "cheat" the system. They can behave perfectly rationally within the rules. The problem is that the rules create an optimization target that isn't identical to the actual social objective.