Monday, March 28, 2016

The Transgender Bounty and Perverse Incentives

I'm generally not very interested in gender studies, LGBT, or bathroom usage patterns on this blog (except for that one time).  But the Kansas Legislature (as sometimes happens) has forced my hand to draw opinion by introducing an element I am interested in: perverse incentives.  (Click here to learn more about this economic term.)

BACKGROUND

Last week, a couple of new bills were introduced into the Kansas Legislature with the aim of making students use the bathroom of their "birth gender."  This is somewhat euphemistic, but the aim is to keep transgender students from using the restroom of their choice/new identity.

The way it implements the policy seems to be two-fold:
  • To make all restrooms at public schools and colleges single (birth assigned) gender.
  • To allow students who encounter "opposite gender" students in the bathroom to sue their school for $2500.
I understand the aim of this legislation for social conservatives point of view, new transgender issues seem to be an attack on tradition understanding of genders.  But I also understand bad incentive structures when I see them.

DISCOVERING BIZARRE INCENTIVES

Always looking to make a buck (and as someone who has spent 8 years of his career designing fraud detection algorithms), my first reaction to this legislation was a $$$ making idea:
I would collude with my female friend, I would go into the women's restroom, she would "encounter" (read: see me) me in her restroom, and then sue the school.  We split the $2500.  Actually the bill appears to give each person right to sue, so if there were 10 female friends in the bathroom we could split $25,000 among us.
I mentioned this scenario offhand to my wife who laughed and called me a weirdo for thinking that way, but we thought not too much of it.  Then I softly brought it up in an online conversation a few days later.



Then I saw a KU Law professor making the same argument a few days later (always good to see someone else thinking in the weird ways I do).


The point here is that the initial law as presented to the public creates a perverse incentive structure, that allows students to make money by encountering a scenario which they could fairly easily orchestrate themselves.  Some general points on this:
  • Actual Incentive is Penalty: The obvious intent of the $2500 fine is to incent schools to create rules and penalties for students that prevent the behavior.
  • Limited Local Penalty: The problem is that students are empowered with financial incentive and the schools would likely be limited in the types of penalties they could levy against the "offender" (detention, suspension, expulsion) to deter cross-bathroom use.
  • High Fraud Incentive: $2500 quite a bit of money for a high school or college student, so this incentive is rather proportionally high (e.g. 8+ weeks at 40 hours and minimum wage).  Thus the penalty to stop this behavior would also have to be high (expulsion?).
  • Politically Impossible in Some Areas: Because the "offender" penalties would have to be set at a local level, the ability to set such penalties would also vary by locale.  For instance, setting a penalty for this at Lakeside High School in rural Downs Kansas would be a much different task than doing it at the University of Kansas.  It may be entirely politically unfeasible to set an expulsion or suspension penalty for transgender bathroom use at KU (or even Lawrence School District).
  • Exiter risk: One of the biggest risks in any financial fraud is what I term "exiter risk."  That is the risk that occurs by people leaving market such that future penalties no longer matter.  A good example is in the consumer credit space: someone racking up additional credit card debt before defaulting/bankruptcy because they aren't going to pay bills anyways.  The same risk exists in this situation: soon-to-be dropouts or transfers have no reason to fear penalties from school, and likely more incentive to commit fraud.

CONCLUSION

The incentives created by this bill have the potential to create fairly large problems, some of them financial, in relation to the current magnitude of the "problem" they are trying to solve.  This is a quickly changing societal issue, and this bill seems like a too-quick, financial penalty-based response to a social issue we are all trying to wrap our heads around.

Wait.  I may .. like this bill.  Is this retroactive?  When I was at Kansas State University I lived in an all-male dorm, where visiting females would regularly use the male restrooms alongside men.  I had to run into at least 40 females in there. Hey K-State, you may owe me at least $100,000 if this thing passes and is retroactive!

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  2. This proposed law references genetic sex (i.e. XX=female, XY=male) as if it were identical to "birth assigned gender." The science deprived legislators of Kansas may be surprised to learn that many phenotypical females are chromosomally XY but are to all appearances female. They don't develop as males due to a mutation that inhibits androgen reception. If they start DNA testing students they're going to open a real can-o-worms.

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