Skin in the game in public services

1 March 2018

Nassim Nicholas Taleb has a knack for timing. His first best-selling book, Fooled by Randomness, was released just before the 9/11 attacks; Black Swan, which speaks of experts’ propensity to underestimate the likelihood and consequence of rare events, was published months before the 2008 financial crisis.

Taleb’s latest book, Skin in the game, is not a tale of the unexpected, but provides timely insights into incentives in economies and institutions. Published in the UK last week, it argues that those who have personal stakes in outcomes, be it money, reputation or legal obligations, make better decisions. Ultimately it is a negative argument: without the threat of adverse consequences, people will not be motivated to provide the best advice, decisions or investments. Taleb argues that many bureaucracies, such as banks or government departments, are not designed in ways to give decision-makers these incentives by separating them from the consequences of actions.

Though not a specific focus of Taleb (a Lebanese-American citizen), this rings true in Whitehall. Recently the spotlight has been shone on the UK Government’s approach to outsourcing public services. In theory, procurement officials should have a reputational and, in some departments, financial stakes in the outcomes of contracts for which they are responsible. But this does not happen. In part this is due to high turnover of procurement officials. Numerous reports have cited this as — as in other areas of government — the cause of a loss of institutional knowledge. But Taleb’s insight is that if people do not stick around to see the consequences of their actions, they will not have ‘skin in the game’, that is an incentive to deliver the best contract. This is hinted at in Gary Sturgess’s recent analysis of procurement where he argued that high-churn amongst officials have resulted in “less accountability for results”.

Taleb’s answer to poor accountability is “to decentralize or, more politely, to localize”. For Taleb, decentralisation offers two headline benefits. First, it exposes decision makers more clearly to the consequences of their actions. Second, it “reduces large structural asymmetries”.

The first point is that clearer accountability introduces ‘skin in the game’. In democracies, a key part of this is through the ballot box. At local levels, UK metro mayors provide clearer accountability for services over which they are responsible – although these are currently limited: the mayor or London is not responsible for the healthcare of Londoners but has an international profile as a leader of a city with a large GDP. For reasons of responsibility over local decisions, Taleb considers the US federated system the superior political constitution. The UK has a long way to go to achieve this level of decentralisation, however.

Being closer to the consequences of actions also speaks to a point Taleb makes in previous work about the true consequences of decisions. Central (one-size-fits-all) decisions too often look to solve policy problems without understanding further consequences. Take the four-hour A&E waiting target, which has led to some emergency departments leaving patients in ambulances so as to not start the timer. Or, less visibly, Quality Outcomes Framework payments made to GPs (worth £1 billion a year), which are designed to improve care for specific conditions, but have resulted in GPs focusing on processes to show they have completed the necessary procedures to receive payments, rather than caring for patients in ways that best suit them.

The second point gets to the heart of siloed decision making. Taleb says that influence or power is not weighted equally in society or institutions. One person or agency can make decisions that affects others. In government, the provision of services is one example. Cuts to drugs rehabilitation budgets (the purview of local authorities), for example, may increase health spend (the responsibility of NHS England) if those who could be helped to overcome addiction require extended health services. Decentralisation can help avoid this by creating single bodies, such as a combined authority, to take responsibility for delivering all these services – thereby aligning incentives to deliver the most efficient services.

These rules, Taleb argues, hold true across private and public institutions. This macro view across whole economies and countries stops Taleb from offering more detailed examples as to how they play out. But the insights should ring true to those operating in government. They may, in that sense, be little more than a compelling identification of long-standing systemic problems. But those charged with organising government to most effectively design policy and spend taxpayer money should be reminded of cause of dysfunction. In that at least, Taleb offers a timely work which should itself incentivise those accountable for delivering services to organise themselves and others to have more skin in the game.

Alexander Hitchcock, Research Manager, Reform



No comments yet.