American Economic Journal: Economic Policy 2020, 12(3): 1–43 https://doi.org/10.1257/pol.20180168 The Perils of High-Powered Incentives: Evidence from Colombia’s False Positives† By Daron Acemoglu, Leopoldo Fergusson, James Robinson, Dario Romero, and Juan F. Vargas* We investigate the use of high-powered incentives for the Colombian military and show that this practice produced perverse side effects. Innocent civilians were killed and misrepresented as guerillas a phenomenon known in Colombia as “false positives” . There were( significantly more false positives during the period) of high-pow- ered incentives in municipalities with weaker judicial institutions and where a higher share of brigades were commanded by colonels, who have stronger career concerns than generals. In municipalities with a higher share of colonels, the high-powered incentives period also coincided with a worsening of local judicial institutions and no discernible improvement in overall security. JEL D72, D74, D82, K41, K42, O17 ( ) hough the classic theory of moral hazard emphasizes the importance of provid- Ting sufficient rewards for “success” or “good performance,” it has long been recognized that high-powered incentives can distort the type of effort exerted or encourage various unproductive activities to improve indicators of performance e.g., ( Holmström and Milgrom 1991, Baker 1992, Dixit 1997 . Several empirical studies ) have documented this distortionary facet of high-powered incentives in teaching, managerial behavior, and bureaucracies e.g., Baker, Gibbons, and Murphy 1994; ( Oyer 1998; Levitt and Jacob 2003; Aviv 2014; Miller and Babiarz 2014; Fisman and * Acemoglu: Department of Economics, Massachusetts Institute of Technology, 77 Massachusetts Avenue, Building E18, Room 269D, Cambridge, MA 02142 email:
[email protected] ; Fergusson: Department of Economics, Universidad de los Andes, Cra 1 No.