Academic journal article
By McCannon, Bryan C.
Contemporary Economic Policy , Vol. 29, No. 4
Policies such as mandated safety equipment in automobiles, the workplace, and packaging of medicine are intended to have a positive effect on the well-being of individuals who consume the goods. Many such policies, however, may provide perverse incentives. By reducing the expected costs, individuals engage in more risky behavior. Hence, the target of the policy acts to offset the rule. This phenomenon has been referred to as the Offsetting Behavior Hypothesis (Peltzman 1975).
The objective here is to illustrate that another but similar problem can exist with policies intended to elicit a particular outcome. A policy, while it may have the intended incentives for the targeted decision maker, may affect the incentives of an agent who is interacting strategically with the target. The non-targeted agent in a competitive environment may counteract the policy. I refer to this phenomenon as strategic offsetting behavior.
Evidence of strategic offsetting behavior is provided using data from National Collegiate Athletic Association (NCAA) men's basketball. Beginning in the 2008-2009 basketball season the three-point line was moved out 12 in. farther from the basket. Presumably, an offensive player found such a shot more difficult to make ceteris paribus. Thus, one would expect the policy to lead to a lower three-point shooting percentage and a substitution toward taking closer two-point shots. A simple theoretical model of the interaction between the offense and the defense is presented. From this it is predicted that the defense, who wants to minimize the expected points scored by the offense in the possession, shifts its defensive strategy away from guarding against the more challenging three-point shot. This counteracts the difficulty of the strategy, or rather, strategically offsets the policy. As a test of this theory, if the defense is shifting its emphasis toward defending two-point shots, then the success of two-point shots should decrease. Empirical results support this assertion and show that success with two-point shots experienced a statistically significant decrease in 2008-2009 as compared to previous years. Additionally, evidence is presented that the policy change had a statistically significant effect on the success with three-point shots. The policy, which makes the three-point shot more difficult still reduces the success offenses have with this shot even with the strategic offset of the defense. Thus, it seems, at least in the application of men's basketball, the policy is only partially offset.
While analyzing the impact of the rule change in men's college basketball, the results point to a potentially important effect with other policies. Offsetting behavior was first illustrated to be important in mandated automobile safety equipment (Peltzman 1975). Viscusi (1984) has illustrated its impact on the required use of childproof caps on analgesics. It has been analyzed in policies governing technological improvements in roads (e.g., width and surface of roads as well as distance from pedestrian paths) (Risa 1994) and has been shown to be important in the National Association for Stock Car Auto Racing (O'Roark and Wood 2004; Pope and Tollison 2010; Sobel and Nesbit 2007). With policies to increase the level of safety the offsetting behavior mitigates the benefit of the rule. The question becomes whether this offsetting is complete and whether, once the negative spillovers are considered, welfare is actually improved. The results presented here add another layer to the question: how does the policy affect the incentives of a third party interacting with the target?
Furthermore, the work provides another example of the benefit of using competitive sports to analyze economic phenomenon. Basketball has been used to address issues such as incentives from contracting (Grier and Tollison 1990; Scully 1994) and racial discrimination (Hamilton 1997; Kahn and Sherer 1988; McCormick and Tollison 2001). …