Chart of the Day: Incentives Matter

Incentives matter:

The explanation is probably simple: opportunity and motive. Part of what makes dictatorships dictatorships is that questioning the official line is dangerous. At the same time, autocratic regimes have a strong incentive to report healthy growth: its absence may be taken as a sign of incompetence or weakness, which dictators can ill afford.
Autocrats’ subordinates face similar incentives. In a related study Jeremy Wallace, a researcher, found misreporting by Chinese provinces, too. As he notes, a leaked American diplomatic cable from 2007 revealed the view of Li Keqiang, the prime minister, then a provincial party secretary. He had said, with a smile, that gdp figures were “for reference only”: he relied instead on proxies, such as electricity use.

Incentives matter is the very first slide in my presentation on Principles of Economics (as it should be). But there’s always more to learn and think about where this deceptively simple idea is concerned, and this chart and the accompanying article from the Economist are a great example about the deceptive bit.

Once you understand the incentives associated with a particular entity in a particular context, you should then learn the art of being appropriately sceptical about their statements. One shouldn’t assume that they’re lying, nor should one assume that they’re telling the truth – one should understand what the incentives are of the person reporting a particular claim, and adjust one’s expectations accordingly.

Incentives matter, and understanding a person’s incentives matters at least as much, if not more.

Like their leaders, citizens in dictatorships often assume they are being lied to. Outsiders should be similarly sceptical.

I’d go one step further, and recommend that while reading, listening or viewing anything, one should keep the incentive of the creator in mind. It makes for a more interesting experience while consuming said content, and you are, at the margin, less likely to be taken for a ride.

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