Unintended Consequences of Fire Brigade Incentives

The story

In the 1840s, Philadelphia had no paid fire department, and volunteer companies answered the city’s alarms. Insurance companies gave those volunteers a reason to hurry. The Philadelphia Contributionship rewarded companies that fought fires at the buildings it insured, and at least one insurer, in nearby Germantown, paid a cash bonus to the first company to get to work on a fire.

Companies raced to every alarm, and rivalry over which of them would put the fire out turned into fights at the scene. Insurance rewards were one of the stakes, alongside neighborhood, gang, and religious loyalties. Riots between companies continued into 1870. That December, the city passed an ordinance creating a paid fire department under its own control, and in March 1871 its salaried firemen replaced the volunteer companies.

Each company was acting rationally. A company that stepped aside and let a rival put out the fire gave up the reward. The city, however, needed the fire put out, and it did not matter which company did it.

How we see it through leadership economics

Some goods work like a loaf of bread. When one customer buys it, nobody else can, and the baker can refuse it to anyone who will not pay. A market handles this kind of good well, because the price shows what the bread is worth to the buyer.

Other goods do not work that way. Economists call a good a public good when nobody can be kept from its benefit and one person’s benefit takes nothing from anyone else’s. Putting out a fire comes close. Once a fire is out, every building near it is safe, insured or not, and nobody can be made to pay for their neighbor’s fire being put out.

The insurers paid for firefighting as though it were a private good like bread. Their reward went to one company, so each company had a reason to beat its rivals to it. What the city needed was the fire out, and that result benefited everyone on the block at once.

A leader can look for the same mismatch on a team. When teammates race to claim credit or undercut each other, the reward may be attached to something only one person can win, while the result the team needs is shared. Philadelphia paid its firemen a salary to fight every fire, which removed the disruptive competition. On a team, there are many things that benefit everybody but its cost is borne by only one person. If the incentive to be that volunteer is disproportionate, you can end up with similar disruptions to team cohesion. Recognizing the extra contributions of a member is important, but it should also be placed in the context of contributing to the team’s success. Like paying all firemen a salary regardless of how many fires they put out, all members of a team share in its success. The incentive to contribute comes from intrinsic rewards, an alignment of individual objectives and team objectives.

A quote we’re thinking about

For that which is common to the greatest number has the least care bestowed upon it. Every one thinks chiefly of his own, hardly at all of the common interest.

Aristotle, Politics, Book II, translated by Benjamin Jowett