Perverse Incentives Analysis

400 Words2 Pages
In this chapter, the author talks about how different types of incentives affect the market economy. One of these incentives is called adverse selection. The example used by the author is the pay of American teachers. Teachers are paid based on years of service and experience, not on performance. This leads many teachers who are high performers to leave their field and seek employment where pay is based on merit (pg.36). For the least talented, they will get paid regardless of their job performance. This type of incentive still attracts certain people into the American workforce and stimulates our market economy. A second set of incentives described by the author are “perverse incentives.” These are described as incentives that occur when