Why Strong Rewards in Government and Nonprofit Programs Don’t Work: A Social Heisenberg Principle (WP-25-01)
Burton Weisbrod
This paper explores the ways that many public programs incorporate well-intentioned funding and revenue incentives designed to improve service delivery, which unfortunately end up being undermined by “gaming” on the part of recipients. This result is sometimes illegal and sometimes not, but it is always economically inefficient and hence undesirable. Drawing on both historical and recent evidence, the paper examines how health care institutions, schools, higher education institutions, and a broad range of other public service industries derive financial incentives from performance outcomes regarding quantity or quality of service provided. This concept also applies to many government reimbursement programs for both nonprofit and profitmaking service providers. Besides providing case studies illustrating distorted and undesirable outcomes, it also explains how and why those results occur, drawing on a “Social Heisenberg Principle” that relates similarities between the concept in theoretical physics and the concept that program performance measurement can and does change program performance outcomes. It ties this effect to reliance on “strong” financial incentives applied to simplistic performance measures that themselves distort outcomes in unexpected ways. It then discusses what should be done (or not done) to avoid the undesired outcomes.