Managing Incentives

Lesson one in our textbook chapter on managing incentives is “You get what you pay for (even when what you pay for is not exactly what you want)”. Case in point is the California cleanup of the 2017 wildfires, at $280,000 per site it’s four times more expensive than similar past cleanups and by far the costliest cleanup in CA history. The state emphasized speed and farmed the job out to the Army Corp of Engineers who hired contractors who were paid by the ton excavated! Paying by the ton created highly u̶n̶p̶r̶e̶d̶i̶c̶t̶a̶b̶l̶e̶ predictable consequences as KQED reports:

…Dan said he saw workers inflate their load weights with wet mud. Sonoma County Supervisor James Gore said he heard similar stories of subcontractors actually being directed to mix metal that should have been recycled into their loads to make them heavier.

“They [contractors] saw it as gold falling from the sky,” Dan said. “That is the biggest issue. They can’t pay tonnage on jobs like this and expect it to be done safely.”

…Krickl pointed to where his home used to stand. It’s a 6-foot deep depression that he affectionately called his “pond”.

That “pond” was created when contractors removed the foundation, soil and an entire concrete pad for Krickl’s garage, leaving behind a large hole.

Here’s my favorite part:

So many sites were over-excavated that the Governor’s Office of Emergency Services recently launched a new program to refill the holes left behind by Army Corps contractors. That’s estimated to cost another $3.5 million.

Hat tip: Carl D.

Comments

What's missing in this post is the reason for the urgency in cleaning up after the fires: to prevent opposition to re-building in this fire-prone area from gaining any traction. The speed with which the counties issued building permits to rebuild exceeded the speed of the clean-up. Indeed, the building permits increased the density of housing. The blog post implies that the government was wasteful, but there was a method to the madness: to accommodate the developers and contractors.

'to accommodate the developers and contractors'

The richer getting richer is always fully approved of at this web site.

Showing the details of that process however, is not the sort of thing that is put into any chapter of their textbook. 'The governor has ordered the suspension of tough zoning, planning and other requirements to help the fire ravaged communities in Northern California bounce back faster. California, which is known for having some of the nation's strictest environmental and building regulations, also is encouraging local agencies to streamline paperwork to make the rebuilding go smoother.

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"This is a monumental undertaking that is in front of us," said Eric Lamoureux, a regional administrator with the Governor's Office of Emergency Services. "It's a historic cleanup that has to occur not only here in Sonoma County but across Northern California."

Lamoureux told reporters this week the goal is to have the cleanup completed by early 2018, and he envisions springtime for the rebuilding to start, perhaps even sooner.' https://www.cnbc.com/2017/10/26/california-begins-fire-cleanup-but-faces-serious-hurdles-in-rebuilding.html

And here is an interesting tidbit about incentives - 'All residents were given the choice to have their lots cleared for free by the Corps of Engineers, but some decided to instead have the cleanup done privately to preserve their foundations — and those private cleanups are not included in the governmental figures released Thursday.' https://www.sfchronicle.com/bayarea/article/Cleanup-all-but-done-on-wreckage-left-by-Wine-12904763.php As if a group of people wanted to ensure that rebuilding happened with as few hurdles or delays as possible.

So you're saying it was not wasteful incompetence by rather wasteful corruption. Small comfort to the taxpayers.

Neither, actually. I am saying that the interests of those expecting to be paid large amounts of money by rebuilding wanted to start collecting their profits as soon as possible, with as little interference as possible.

As American as apple pie. And one would think that American taxpayers know precisely how this game is played.

The part about avoiding detrimental run off is not tangential, but is not really central either.

So, requiring government workers to do the job would have taken too long and cost too little because lazy government workers would have done the minimum required cleanup, if that, increasing the incentives of each owner to do the work themselves?

Note, the reasons for rebuilding quickly include increasing the property value of homes that survived or that were rebuilt, reducing the demand for housing to cut housing prices, which harm workers/taxpayers, increase costs to taxpayer paying for housing (subsidies), increase property tax revenues, utilities fees, get students back to the schools with teachers, classrooms, bus service.

Pay attention those of you who want the government to run health car and public schools.

By outsourcing the job to private businesses who seek to maximize profits over delivering results for those paying the bills with no say of how the work is done.

E.g., in the US, you have virtually no say over the price and profits of the drugs you need for health reasons. The drug industry sets the prices based on increasing their profits to "create wealth" by inflating stock share prices, not to to increase your health.

In the rest of the world, governments have incentive to get the most effective drug delivery at the lowest costs.

You argue this is bad because how can the 99% epipen be replaced with a new epipen that is 99.1% effective as long as the newer more complex version isn't defective and is replaced by a recall you probably didn't know about, with a price three times as high, but only twice the profit after all the added costs of legal, marketing, etc.

Or do you want the system in the developing world where you get to buy counterfeit drugs complete with holograms and at best a fraction of the active ingredient? Very free market, buyer beware.

Antibiotics and vaccinations together have probably saved billions of lives. Thank god there were greedy people willing to go to school for 20 years and work long hours most of their lives and create these lifesaving drugs. The profit motive is pretty strong.

If the drug companies were actually acting as greedy as you paint them the profits would encourage more competition and the competition would reduce the prices. The drug industry is fairly stable not a lot of new companies to try to soak up all that gravy you imagine is there. So I suspect you a simply wrong about the fantastic profits of the drug industry. The major cause of high drug prices is the government and in particular the FDA. While I support the FDA I think their red tape and excessive bureaucracy is hurting all of us and they need a major overhaul. That would reduce drug prices.

I paid 3 Benjamins for a bottle of pills for my Hillary Derangement Syndrome. They told me they're raising the prices again. I'm getting sick of Hillarycare. I hope voters vote her out of office.

Yes, and they have to work faster than the environmental lawyers.

Is what you describe is not wasteful? Less wasteful?

There is method in the madness of throwing money at contractors, too. Or dropping it from helicopters, or staging fake alien invasions.

The actually indicates the importance of law, contracting and oversight.

Aren't we really talking about contract specification (contract specifying objective, no cost plus feature) and competitive bidding?

Also, from what is described, it looks like fraud, for which there is a legal remedy.

Who needs an economist when you can have a good lawyer!

+1

I must give myself a +1 on this comment because the rules of the MR website do not prohibit it.

lol

Just responding to incentives (as Alex would say) and the absence of a contract (as I would say).

Funny. Just write an article for Forbes.com on this subject. Wish I'd had your opening line to cite before submitting! This is incredibly common in business and occurs when companies believe they are incentivizing an outcome but are instead incentivizing an outcome-defeating behavior. Call centers, for example, are often guilty of imposing calls-per-hours performance metrics to gain efficiencies. And operators then dump calls or escalate them to supervisors to increase their per-hour numbers. Costs rise as unsatisfied customers call back, or higher-paid supervisors handle calls meant for front-line operators. It happens across industries, with tech suffering to, inadvertently disincentivizing innovation in their development performance metrics.

Funny. Just write an article for Forbes.com on this subject. Wish I'd had your opening line to cite before submitting! This is incredibly common in business and occurs when companies believe they are incentivizing an outcome but are instead incentivizing an outcome-defeating behavior. Call centers, for example, are often guilty of imposing calls-per-hours performance metrics to gain efficiencies. And operators then dump calls or escalate them to supervisors to increase their per-hour numbers. Costs rise as unsatisfied customers call back, or higher-paid supervisors handle calls meant for front-line operators.

It happens across industries, with tech suffering too, inadvertently disincentivizing innovation in their development performance metrics.

One need not cast one's gaze far in order to discover numerous examples of excessive loquaciousness whenever there exists a situation in which a writer's compensation is dependent upon the total number of words written down.

In defense of the CA State Government.... it's not like they were spending their own money. It was taxpayer money. So keep that in mind.

Paying people to fill in the holes is a great idea! Perhaps the state of CA should keep the environment in mind, and pay people more if the dirt used for filling is local -- ideally as close as possible to the hole being filled in.

It's Keynesian, isn't it.

Clicking through, I see the article focuses on the real sin committed in the cleanup effort: the companies involved did not hire local union labor.

The horror! Cue the Outrage Machine! Start the presses!

This is the only reason you are hearing about this story, and the only reason anyone is complaining about the cost.

That's right -- the company's desire to keep costs down are the only reason why Alex learned the cost was so high.

Talk about managing incentives!

Hillary thought she won the election. Hillary.

This is really a specific instance of a more general principle: when a (valid) metric is used as an evaluation criterion, the metric loses its validity.

It is easy to criticize, and perhaps in this case the contracting was poorly done. But it is often the case that the true objective of a project is complex, multifaceted, and difficult or impossible to spell out in a feasible set of performance metrics. So we resort to proxy measures of performance. Of course, those get gamed, and that should never surprise us (although the particular game might be surprising). But that is life, and sometimes a bad outcome is the best you can get under the constraints of the circumstances.

+1 Difficulty of contract specification under conditions of uncertainty.

It's funny how folks frame it as solely incentives when Oliver Williamson dealt with the more complex issue of when to do it yourself v. when to contract, and then, if you contract, what are the places where you can be exposed.

In this case, for example, if the county had its own highway or construction department it would have been better able to do part of the project or oversee specifications and contracting.

But, on this website, one does not want to discuss government as a partial integrator into a market so that it can perform a make or buy decision.

Makes me think of the no child left behind program and the growth in school bureaucracy/administration.

Seems to PISA and other standardized tests are too close to IQ tests to be of much use judging school quality, and if we trusted Principles and teachers we could get as good results much cheaper. Teachers are mostly interested in their students doing well as are parents.

Being allowed much higher leverages with assets dangerously perceived as safe, banks were given incentives to build up especially large exposures to assets perceived as safe, against especially little capital, thereby setting bank systems up for especially large crises

https://subprimeregulations.blogspot.com/2018/07/trade-wars-will-mean-new-tariffs.html

The opinion piece did not mention the skills and knowledge that was being considered in the 30 hours. We can't measure how onerous the 30 hours are, unless we can see what we are getting in return for the investment of time.

It's always important to get the facts before forming an opinion.

Some other facts for context:

1. Homeowners had to affirmatively opt for Corps of Engineers debris removal. Many chose to hire their own contractors.
2. Homeowners knew in advance that the Corps of Engineers contractors would automatically remove the foundation. No one was surprised by this.
3. A motivating factor for paying for speedy removal was the impending rain season. Quicker removal prevented other damages and costs that would have accrued from debris being washed into rivers and streams and groundwater.
4. "Over-excavation" is a purely subjective characterization. The same article describes the fire debris as toxic. Removing wet mud may have been entirely legitimate given contamination concerns.

Goodhart's Law never fails

Wow, looks like Goodhart predated Lucas, I didn't know that... (Wikipedia) "However, some parts of the concept considerably pre-dates Goodhart's statement in 1975.[4] Shortly after Goodhart published his paper, others suggested closely related ideas, including Campbell's law (1976) and the Lucas critique (1976). "

Bonus trivia: missing in all of the comments so far is the Keynesian aspect of all of this...the gobermint is right after all, 'digging a whole lot and filling it up again'.

Wow, a military agency with a blank check mandate! They made mission though!

This reminds me of the time when Congress cried in unison, "How are we going to fund it!" when they heard about the true cost of the dead weight F-35.

Where I live, there is a small home repairs firm that does everything by the hour, and not cheap too. He is booked out six week in advance. (Though I think he also does a good job of keeping the firm "small".) My interactions with him suggest he is honest: I think he works hard to maintain credibility, especially in a world of online reviews.

There are also lots of plumbers who work by the hour and have no shortage of business. Like the contractor, I get the sense that the per hour plumbers tend to be the more honest and straightforward.

Online reviews (or any form of review) is the key, something that governments don't do well.

Only slightly related but:

I was talking to a friend and we both had our electricity out for about a week last year after a hurricane, and we had middle-class neighbors who got reimbursed by FEMA for food that went bad in their refridgerators. We both find that outrageous. FEMA should not be throwing $ around on frivolous stuff for middle-class people. No wonder people vote GOP.

I'd rather money go to the middle class than to the rich. That's why I'm anti-GOP.

In some places the companies in charge of maintaining electricity supply are fined if the power goes out for more than a specified length of time and the fine goes to the people who went without power.

Why did union workers get laid off? Were they gouging the contractors?

Well, the Corps does love to dig. Just need to make sure there's some institutional memory of it:

https://www.youtube.com/watch?v=a8waMEzsZno&t=30s

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