The Tired Tale of Bad Incentives

(Photo by Nicholas Kamm/AFP via Getty Images)

Hi,

Here’s a great way oil companies could lower their “obscene profits”: give all of their employees massive raises. Or, they could go on a wild spending spree on unprofitable investments. Or, they could take all of their cash and place a massive wager on the betting markets that the Democrats will win big in the midterms.

In other words, they could boost their costs, bad investments, or losses so their profits shrink or even disappear.

Obviously—or, I should say, “It should be obvious that”—there are some big problems with this approach. First, it would be very stupid. But there’s no law against being stupid with your money, right?

No, there’s not. But corporate executives aren’t spending their own money, they’re spending their shareholders’ money. While you are free to blow as much of your own shmundo on pet rocks, meme stocks, or a “seeing eye cat” business, there are laws against blowing other peoples’ money on stupid stuff.

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