Creating the Right Future Incentives

Before choosing a solution, consider the future incentives it creates. An immediate benefit can start a harmful reinforcing feedback loop.

A classic example of today’s solution inadvertently creating a reinforcing feedback loop of future problems is paying off kidnappers. The immediate problem is someone being kidnapped and a ransom being demanded. If you have the resources to meet the kidnappers’ demands, you might want to pay the money right away. Payment may secure the captive’s release.

However, your response communicates to the kidnappers that you will meet their demands. You thus create an incentive for them to kidnap again, as well as signal to other would-be kidnappers that there is money to be made. Payment can therefore reinforce the behavior that created the emergency.

In many legal systems, each decision by a court becomes a bit of information that moves via a feedback loop into the stock of legal options to influence both how the system responds to future cases and how judges form future decisions. Each decision becomes legal precedent. In The Legal Analyst, Ward Farnsworth explains that in making decisions courts will consider “what incentives people will have after the case is over.”[6] Courts need to be careful. If they compensate for a wrong now, they could create a climate that increases the chances of that wrong happening again.

Liability decisions can also shape incentives. Consider a hypothetical demand that a government pay a ransom for a citizen kidnapped overseas. Requiring compensation whenever it refuses could give the government a stronger incentive to pay future ransoms. This illustrates an incentive to examine, rather than establishing how a court would decide a particular case. When considering certain instances of liability, Farnsworth explains, “Instead of looking back and deciding who should bear the suffering, [a court] can look ahead and decide what ruling will make the suffering less likely to occur later.”[7]

In some situations, choosing an immediate benefit creates reinforcing feedback loops that remove the possibility of future benefits. For cases like these, laws are designed to support balancing feedback loops, such as protecting attorney-client privilege, or copyright and patent laws. Although one could argue for the immediate benefit of, say, forcing a defense attorney to testify about what their client disclosed, the feedback loop created would make clients disinclined to disclose things to their attorney. As Farnsworth summarizes concerning copyright protection, “Once books and music exist…there’s a great case for free distribution of them. But then they are less likely to exist at all next time.”[8]

An incentive-based argument can conflict with fairness in an individual case. Someone may be “excessively” punished on the argument that the penalty will deter others. Assessing that argument requires examining whether the deterrent effect occurs and how to weigh it against the treatment of the individual.