Dispatch #111: When good intentions backfire - Rethinking incentives in public policy
This dispatch explores how misaligned incentives in governance can derail policy outcomes and how smarter, context-aware design can fix them.
In governance and public policy, incentives have long been regarded as central to improving outcomes. The logic is simple: structuring the right incentives should produce better performance if individuals respond to incentives in predictable ways. This belief has driven decades of reform, from pay-for-performance schemes in education and healthcare to results-based financing in public administration.
However, real-world examples often challenge this logic. For instance, consider a ministry that introduces an incentive program to conduct training sessions on new technology for its staff. The intended outcome is to build digital capacity so employees can use new systems effectively. But if the incentive for the ministry is tied only to the number of training sessions conducted, rather than the actual uptake or application of the technology, then the focus quickly shifts. Workshops may be hastily organized, attendance recorded, and reports filed to meet targets, while participants remain poorly equipped to use the tools. Here, the incentive structure pushes administrators to prioritize quantifiable outputs over meaningful learning, ultimately undermining the very outcome it aimed to support.
This is a classic example of what Public Choice Theory describes as goal displacement, where bureaucracies pursue what is easy to measure, rather than what truly matters. The ministry's incentive is to show activity (number of trainings), not effectiveness (actual tech adoption). Ironically, the system rewards a proxy for success while leaving the intended outcome, such as staff being able to use new technology, unmet. In this way, an incentive designed to signal progress may end up institutionalizing underperformance.
Many of these incentive-driven reforms, while well-intentioned, have failed to produce the desired outcomes. Worse, they have sometimes led to unintended consequences: perverse behavior, short-termism, erosion of intrinsic motivation, and bureaucratic inertia. This raises a fundamental question: Can the very incentives meant to improve governance undermine it?
Public Choice Theory offers a compelling lens to understand this puzzle. This post explores the relationship between incentives and governance outcomes through that lens, arguing that incentives can, in certain contexts, distort public purpose and kill outcomes. However, it also explores how better-designed incentives, rooted in a deeper understanding of institutional behavior, can still play a constructive role in policymaking.
Public Choice Theory and the Incentive Dilemma
Public Choice Theory, pioneered by economists such as James Buchanan and Gordon Tullock, applies the logic of economics to political and bureaucratic behavior. Its core assumption is simple but powerful: actors within public institutions, such as politicians, bureaucrats, voters, and interest groups, act in self-interested ways, responding to incentives much like actors in markets do.
This perspective challenges the traditional, idealistic view of the public sector as a neutral guardian of the common good. Instead, it sees public institutions as arenas where individuals pursue their own goals, often at odds with collective welfare. Gordon Tullock pointed out that bureaucrats are incentivized to grow their departments—not necessarily to deliver outcomes—because increased budgets often signal performance. Similarly, William Niskanen’s Budget-Maximizing Bureaucrat model suggests that bureaucrats prefer policies that increase their discretion and budget, rather than those that maximize social welfare.
Under this framework, incentives are not inherently good or bad. Rather, they are instruments that shape behavior, and their outcomes depend on how well they align individual motivations with public goals. The dilemma arises when incentives are poorly designed, too narrow, or too detached from the complexities of policy environments. This can lead to several adverse effects:
Goal displacement: Individuals begin to focus on the measurable indicator rather than the intended outcome (e.g., number of schools built vs. learning outcomes).
Gaming and manipulation: Agents exploit loopholes or distort data to meet targets without achieving real progress.
Crowding out intrinsic motivation: When professionals are overly monitored or financially incentivized, their internal commitment to public service may weaken.
Short-termism: Incentives tied to electoral or budget cycles can prioritize visible, quick wins over sustainable, long-term reforms.
Policy capture: Incentives can be designed or co-opted by interest groups to serve their own ends, especially in low-accountability environments.
Thus, Public Choice Theory helps us see incentives not as neutral tools but as deeply political and context-sensitive mechanisms. Poorly designed incentives don’t just fail to deliver outcomes; they can actively subvert them.
Can Incentives Be Redesigned to Support Outcomes?
While Public Choice Theory offers a cautionary tale about the misuse of incentives, it does not call for their abandonment. Instead, it offers principles for designing better incentives—ones that are more aligned with institutional realities and human motivations.
Align incentives with multi-dimensional goals
One of the most common pitfalls in incentive design is the over-reliance on narrow, quantitative metrics, such as test scores, number of beneficiaries reached, or units delivered, as proxies for success. While these metrics are easy to track and compare, they often fail to capture the full complexity of public service delivery. Worse, they can distort behavior by encouraging teaching to the test, data manipulation, or box-ticking exercises that prioritize quantity over quality. To address this, policy designers should move toward multi-dimensional performance frameworks that combine a broader set of indicators. These might include:
Outcome indicators that track real-world impact (e.g., improvements in learning, reductions in disease burden, or better infrastructure use);
Process indicators that assess the integrity, inclusiveness, and transparency of implementation (e.g., how decisions were made, who was consulted, whether procedures were followed);
Qualitative indicators, such as citizen feedback, staff satisfaction, or expert review, provide a richer understanding of whether the service is meaningful and valued by those who receive it.
Equity indicators that reveal how fairly the benefits of a program are distributed across regions, genders, or social groups.
For example, in the education sector, measuring only test scores might reward schools that teach to the test while neglecting creativity, critical thinking, or inclusivity. A more balanced approach might combine academic results with teacher feedback, classroom observations, student well-being, and parental satisfaction.
Incentives aligned with this multi-dimensional view of performance are less prone to gaming, better reflect the real goals of public service, and support a more holistic and sustainable approach to governance. They also signal trust in the professionalism of public servants and encourage a broader commitment to public value, not just target compliance.
Protect and leverage intrinsic motivation: Public servants are not merely utility-maximizing individuals responding to external rewards; they are often motivated by a deep sense of duty, professional identity, ethical responsibility, and a commitment to public service. These intrinsic motivations are central to why many choose and remain in public sector roles, despite lower financial rewards compared to the private sector. When incentive structures ignore these internal drivers and rely solely on extrinsic rewards like bonuses or rigid performance targets, they risk eroding the very ethos that sustains high-quality public work.
Instead, policies should aim to nurture and sustain intrinsic motivation by recognizing what matters to public servants. This includes systems of meaningful recognition, such as peer acknowledgment, public appreciation, or awards for integrity and innovation. It also involves investing in professional development, enabling employees to grow their skills, expand their expertise, and stay connected to their broader mission. Most importantly, granting autonomy and discretion, allowing public servants to exercise judgment, solve problems creatively, and take ownership of their work, can significantly enhance motivation and job satisfaction.
Well-designed public institutions understand that motivation is not merely a transaction, but a relationship built on trust, respect, and shared purpose. A healthy balance between intrinsic and extrinsic incentives is essential for sustaining morale, preventing burnout, and achieving long-term governance outcomes.
Design for adaptability, not rigidity
Incentive structures must recognize that governance is not a static exercise—public challenges evolve, contexts shift, and what works today may not work tomorrow. Yet, many incentive systems are designed as fixed, one-size-fits-all contracts that lock institutions into rigid performance frameworks. These static models often become outdated, misaligned with field realities, and resistant to course correction. When that happens, public servants are left chasing outdated targets or metrics that no longer reflect the underlying policy goals.
To avoid this, incentives should be designed with built-in adaptability. This means embedding them within feedback loops that regularly collect information on what’s working, what’s not, and why. These loops can draw from performance data, frontline feedback, citizen input, and independent audits to guide periodic review and refinement.
For example, in a health insurance scheme, early data might show that incentives for hospital admissions have increased unnecessary procedures. A rigid incentive model would continue to reward this behavior, while an adaptive one would trigger a re-evaluation, shifting incentives toward preventive care or outcome-based payment models.
Adaptability also means allowing room for contextual variation. Different regions, departments, or service environments may require different incentive mixes. A remote rural district might need flexibility on timelines and targets that wouldn’t apply in an urban setting.
By designing incentives as living instruments rather than fixed levers, policymakers can ensure that systems stay responsive to change, learn from experience, and remain focused on outcomes rather than procedures. Adaptable incentives foster resilience, institutional learning, and better alignment between intent and implementation over time.
Account for the political economy and institutional context
Incentives do not operate in a vacuum. They are embedded within the political economy and institutional architecture of a society, shaped by power relations, bureaucratic norms, informal networks, and vested interests. A common mistake in policy design is assuming that technically sound incentive structures will work universally, regardless of the context in which they are deployed. In reality, even the most rational incentive system can fail if it clashes with the underlying political and institutional realities.
For instance, a reform that rewards civil servants for transparency may be undermined in an environment where powerful actors benefit from opacity and rent-seeking. Similarly, performance-based pay for teachers might fail in systems where hiring and promotions are driven by patronage rather than merit. In such contexts, frontline actors may lack the autonomy, protection, or resources needed to respond to the new incentives, regardless of how well they are designed on paper.
To be effective, incentive design must be politically aware and institutionally grounded. This involves:
Anticipating resistance from actors whose interests may be threatened;
Mapping stakeholder interests, including bureaucrats, unions, politicians, private contractors, and beneficiaries;
Building coalitions of reform champions who can support, legitimize, and sustain the reform;
Sequencing reforms to build trust and demonstrate early wins before introducing more disruptive changes.
Crucially, this also means aligning incentives with existing institutional capacities. In fragile bureaucracies with low administrative bandwidth, simple, low-stakes incentives may work better than complex, high-stakes systems that cannot be enforced.
Incentives that ignore these realities may look elegant on paper but collapse in practice. Conversely, designs that are attuned to power dynamics, institutional norms, and implementation constraints are more likely to survive political headwinds and deliver lasting outcomes. The goal is not just to design technically sound policies, but politically viable and contextually credible ones.
Embed transparency and accountability
For incentive systems to be effective and trustworthy, they must be anchored in mechanisms that promote transparency, oversight, and corrective action. Without these guardrails, even well-intentioned incentives can be gamed, captured by vested interests, or manipulated to serve private rather than public goals. In low-accountability environments, performance metrics may be inflated, data may be falsified, and outcomes may be misrepresented, all in the name of meeting targets.
To prevent this, transparency must be designed into the incentive architecture itself. This includes:
Public reporting of performance data and outcomes in formats that are accessible and understandable to citizens, media, and civil society;
Independent audits and third-party evaluations that verify the accuracy of reported results and assess whether incentives are achieving their intended effects;
Grievance redressal mechanisms that allow citizens and frontline workers to flag problems, lodge complaints, and challenge distortions;
Feedback loops that incorporate citizen perspectives, frontline realities, and external evaluations into policy adjustments.
For example, publishing real-time dashboards on school attendance or health facility performance can create pressure for accountability, especially when combined with social audits or community scorecards. Similarly, using independent agencies to validate results tied to performance-based funding can reduce the risk of internal manipulation.
Importantly, accountability is not just about punishment; it is about learning. A transparent system allows for honest reflection on what’s working, what isn’t, and why. It creates the space for adaptive management, mid-course corrections, and shared responsibility between policymakers and implementers.
By embedding transparency and accountability into incentive systems, governments not only deter abuse, they also build public trust, reinforce institutional legitimacy, and strengthen the credibility of reform efforts. In short, transparency transforms incentives from levers of control into tools for collective learning and democratic oversight.
Embrace incentives as nudges, not levers
Not all incentives need to be heavy-handed or tied to financial rewards and penalties. In many cases, small, well-designed nudges, subtle changes in how choices are presented or information is framed, can gently guide behavior in desired directions without resorting to coercive or costly measures. Drawing on the insights of behavioral economics, these nudges recognize that people do not always make decisions based on pure rational calculation. Instead, they are influenced by cognitive biases, social norms, habits, and how options are structured.
For example, changing the default setting on government forms to automatically enroll employees in pension schemes, while giving them the option to opt out, has dramatically increased savings rates in many countries. Similarly, framing information about energy usage in terms of how one’s consumption compares to neighbors can motivate households to reduce waste. In public health, simply reminding parents via text messages about immunization schedules can significantly increase compliance, without any material incentive involved.
These small design tweaks may seem minor, but they often produce large behavioral shifts. Unlike rigid performance contracts or punitive systems, nudges are less intrusive, more cost-effective, and easier to adapt across different contexts. They work with the grain of human behavior, not against it.
Of course, nudges are not a silver bullet. They must be used ethically, transparently, and in tandem with broader institutional reforms. But as a complement to traditional incentives, they offer a powerful tool for public policy, especially in settings where trust is low, administrative capacity is limited, or cultural factors resist top-down mandates.
In conclusion, the debate over incentives in governance and policymaking is not a binary one. Incentives can motivate, distort, enable, or derail, depending on how they are designed and embedded within institutions. Public Choice Theory offers a vital corrective to simplistic views of governance by showing how self-interest, institutional rules, and incentive structures interact in complex ways.
Incentives that are poorly designed, overly rigid, or politically blind can indeed kill outcomes. But incentives that are thoughtfully crafted, context-aware, and responsive to real-world behaviors can help align individual motivation with public purpose. The task, then, is not to abandon incentives, but to treat them as instruments of design, tools that must be wielded with judgment, humility, and a deep understanding of how governance works.
In this video, Buchanan and Tullock discuss their book The Calculus of Consent to mark its 25th anniversary in 1987.