Soccer (or Football in most of the world) has become a great demonstration of perverse incentives. If you haven't watched the video above before reading this, take a moment to watch it now. When economists say that incentives are perverse they mean that they are "off" in some way, not that they are perverted in the sexual sense of the word.
Incentives matter a lot. You may want people to behave a certain way, but what really will affect behavior is incentives. Incentives are incredibly powerful and economists understand this fact much more than most other individuals. Misunderstanding the importance of incentives causes individuals and organizations a lot of headaches and confusion.
One example of perverse incentives is the diving that now occurs in soccer throughout the world. I'm fairly young and I've grown up in an increasingly diving-prone soccer environment, but I still understand that diving is absolutely ridiculous. Few soccer players don't dive today and I deeply respect them, but are the rest of the players who consistently dive just crazy for engaging in such a ridiculous and degrading act?
Obviously most soccer players don't engage in the absolute ridiculousness demonstrated in the above video, but in my opinion, diving is degrading and pathetic if you dive to get a penalty kick. Diving to prevent injury or to minimize the chances of being injured is a completely different story. Still, soccer players often dive at what appears to be a slight touch. Soccer players dive and send their bodies on trajectories that in no way match the ballistic trajectory that would be expected from the initial contact. Most soccer fans can tell that these players are diving and playacting. Then why do these professional athletes engage in such a ridiculous act? The answer is incentives. Incentives align in such a way to make such action profitable despite the costs (which I believe are not insignificant).
The incentives for diving and playacting should be fairly obvious. Diving increases the chances that a foul will be called, benefiting the player’s team. Over time, as more people do this sort of thing, the pull to do it also increases because if everyone is doing it, you are penalized in a way if you don’t do it. It’s the same thing with steroids. If everyone in a sport takes steroids and you are the only one that doesn't do it, you are deeply penalized because you will likely always under-perform. That explains in part why athletes often take steroids despite the fact that taking them is a foolish and dangerous act.
The costs of diving are not insignificant in my opinion, however. Diving is a bit ridiculous and degrading when overdone. A soccer player should epitomize sportsmanship and strength, not be always on the lookout for an opportunity to fool the referee. This is degrading to the soccer player personally and degrading to the sport generally. Another cost is just looking foolish, but that cost has greatly decreased because more and more people are engaging in this behavior.
So, we have a situation in which the benefits of the action seem to outweigh the costs. Over the last few decades this difference has increased greatly due to the fact that more and more players engage in diving. The larger number of players engaged in diving lowers the costs because it seems less ridiculous and degrading. The benefits seem to have remained the same for the most part.
But what did I mean when I said there were perverse incentives? Why are the incentives to dive perverse? Let’s begin with a general definition of perverse incentives.
A perverse incentive is an incentive that has an unintended and undesirable result which is contrary to the interests of the incentive makers. Perverse incentives are a type of unintended consequences. (Wikipedia)
Can you think of other perverse incentives? How about the perverse incentives to lend too easily during the last decade. Those perverse incentives brought on the financial crisis and the Great Recession? Easier lending regulations and practices were created to promote a noble cause, increased home ownership. These easier regulations, combined with mortgage securitization (where originators of loans didn't really hold on to their loans but instead sold them off, often packaged with other loans), created a situation with perverse incentives, ultimately leading to a very unpleasant global financial crisis.
We can learn, from both diving in soccer and from other situations where perverse incentives exist, that incentives matter a lot. Noble causes may be espoused and rules may be created, but the wise economist knows that if you really want to predict how people are going to act, looking at the incentive structure that exists is one of the best ways to begin analysis. Perverse incentives and unintended consequences are real things that can lead to sub-optimal outcomes and everyone from parents to teachers to various rule-makers to policy-makers and to law-creators should take care to make sure that incentives line up in the right ways lest unintended consequences and perverse incentives bring on disaster.