The Trap of Perverse Incentives
— Why "The Squeaky Wheel Gets the Grease" Is Institutional Failure

In any organization — whether a family, a corporation, or a nation — there exists a seemingly paradoxical phenomenon: those who silently contribute are taken for granted, while those who loudly complain receive more resources. This is not coincidental but the inevitable result of incentive structures. When "compliance" goes unrewarded and "protest" yields benefits, the system gradually evolves toward a pathological equilibrium — until the entire organization collapses.

I. The Social Version of Gresham's Law: Bad Behavior Drives Out Good

In 1558, English financial advisor Thomas Gresham observed a famous monetary phenomenon: when two currencies of the same face value but different intrinsic worth circulate simultaneously, people tend to hoard the "good" currency (higher gold content) and spend the "bad" currency (lower gold content). The result: bad money drives out good money.^[1]

This logic can be extended to social behavior. In any organization, if "good behavior" and "bad behavior" receive the same reward — or worse, if bad behavior receives a better reward — then good behavior will gradually be eliminated.^[2]

Consider a simplified scenario: an organization with two types of members:

• Cooperators: Silently contribute, don't complain, take on extra work
• Demanders: Frequently complain, demand special treatment, threaten to leave

If the organization treats both equally, or even prioritizes satisfying the demanders' needs to "keep the peace," then:

• The demanders' strategy is reinforced (complaining works)
• The cooperators' strategy is punished (contributing goes unrewarded)
• Over time, cooperators either leave or transform into demanders

This is the social version of Gresham's Law: when bad behavior is more "effective" than good behavior, bad behavior drives out good behavior.^[3]

II. Adverse Selection: Misreading the Signals

Nobel laureate George Akerlof's theory of "adverse selection" was originally used to explain market failure in the used car market.^[4] But it applies equally well to behavioral choices within organizations.

The core problem of adverse selection is: when decision-makers cannot distinguish between "types," they rely on observable "signals" to make judgments — and signals can be distorted.

In an organizational context, decision-makers (such as managers or parents) face information asymmetry:

• They cannot directly observe each member's "true contribution" and "true needs"
• They rely on observable signals to judge: Who is complaining? Who appears "satisfied"?
• Those who silently contribute send the signal "everything is fine" (even when it isn't)
• Those who loudly complain send the signal "I need more" (even when they don't)

If decision-makers interpret "not complaining" as "not needing" and "complaining" as "needing," they will systematically transfer resources from cooperators to demanders.^[5]

2.1 The Cost of Silence

There is a profound asymmetry here: complaining is "cheap" (cheap talk), while silently bearing the burden is "expensive".

When a person chooses not to complain and continues contributing, the costs they bear include:

• Actual investment of time and energy
• The psychological cost of being overlooked
• Opportunity costs (time that could have been spent on other things)

But these costs are "invisible" to decision-makers. In contrast, the "distress signals" sent by complainers are highly visible — even if these signals may be strategically exaggerated.^[6]

Over the long run, this asymmetry leads to an absurd outcome: the most cared-for members of an organization are often those who contribute the least; the most overlooked are often those who contribute the most.

III. Moral Hazard: How Appeasement Creates Monsters

"Moral hazard" is a core concept in insurance economics: when a person's risk is borne by others, they tend toward riskier behavior.^[7]

This concept can be directly applied to organizational behavior: when a person's "dissatisfaction" is always accommodated, they tend to express even more "dissatisfaction".

Consider the following dynamic:

1. The demander expresses dissatisfaction and demands more resources
2. The decision-maker, seeking to "keep the peace," satisfies the demand
3. The demander learns that complaining is an effective strategy
4. Next time, the demander expresses greater dissatisfaction and demands more
5. The decision-maker capitulates again...

This creates a positive feedback loop: each act of appeasement reinforces demanding behavior, making the next demand more extreme.^[8]

3.1 A Mathematical Analysis of the Appeasement Strategy

Let us use a game-theoretic framework to analyze the long-term consequences of the "appeasement" strategy.

Setup:

• In each period, the demander can choose "Demand" (D) or "Not Demand" (N)
• In each period, the decision-maker can choose "Accommodate" (A) or "Refuse" (R)
• If the demander demands and the decision-maker accommodates, the demander gains payoff b, and the decision-maker incurs cost c
• If the demander demands and the decision-maker refuses, both enter "conflict," each losing k

In a one-shot game, if k > c (the decision-maker is very conflict-averse), the decision-maker's best response is to always accommodate — this is the "appeasement equilibrium."^[9]

But in a repeated game, the problem with this strategy is:

• The demander knows the decision-maker fears conflict
• Therefore the demander will continuously escalate demands (knowing they will be met)
• Long-term total cost = Σc_t, where c_t increases over time
• Eventually, the total cost may far exceed the "conflict cost" k of refusing at the outset

This is the core paradox of the appeasement strategy: the price paid to avoid short-term conflict will, in the long run, far exceed the cost of confronting the conflict directly.^[10]

3.2 An International Relations Analogy: The Policy of Appeasement

The most famous historical case of "failed appeasement" is the Anglo-French appeasement of Nazi Germany in the 1930s.^[11]

Each time Hitler made new territorial demands, Britain and France chose to accommodate, hoping to secure "peace." But the result was:

• Each concession reinforced Hitler's belief that the Western powers would not resist
• Each concession made Hitler's next demand more extreme
• Ultimately, appeasement not only failed to prevent war but caused war to erupt under far more unfavorable conditions

Churchill's famous observation precisely captures this logic: those who choose dishonor over war will ultimately face both.^[12]

This logic applies equally to appeasement strategies within any organization.

IV. The Contributor's Dilemma: Why "Good People" Get Punished

Let us analyze this system from the perspective of the cooperator (the silent contributor).

4.1 The "Taken for Granted" Trap

Psychological research shows that people undergo "hedonic adaptation" to persistently good things — they become the new baseline, no longer perceived as "good."^[13]

Applied to organizational settings:

• The cooperator's contributions are initially appreciated
• But over time, these contributions become "expected"
• Eventually, they become "taken for granted" — no longer seen as "contributions" but as "basic obligations"
• If the cooperator reduces their contributions, it is seen as "betrayal"; if they maintain them, there is no reward

This is a one-way ratchet: once you have established the expectation of high contribution, it is very difficult to lower it, yet you receive no greater reward for maintaining it.^[14]

4.2 The Spiral of Silence

Communication scholar Elisabeth Noelle-Neumann's "spiral of silence" theory posits that when people perceive their opinion as the "minority," they tend to stay silent, thereby making the minority opinion appear even more marginal.^[15]

A similar dynamic occurs within organizations:

• Cooperators see that the demanders' strategy "works"
• But cooperators, due to their values or personality, are unwilling to adopt the same strategy
• Cooperators remain silent and continue contributing
• Decision-makers hear only the demanders' voices and assume "everyone is like the demanders"
• Resources are further tilted toward the demanders
• Cooperators become even more silent (because speaking up seems futile)...

This is another vicious cycle: silence leads to being overlooked, and being overlooked reinforces silence.^[16]

4.3 Exit, Voice, and Loyalty

Economist Albert Hirschman, in his classic work, proposed that members facing organizational decline have three options: Exit, Voice, and Loyalty.^[17]

The cooperator's dilemma is:

• Loyalty: Continue contributing, but be taken for granted
• Voice: Express dissatisfaction, but this contradicts the cooperator's self-identity
• Exit: Leave the organization, but there may be emotional or practical costs

Ironically: the most loyal members are often the last to speak up and the last to leave — giving the organization the least opportunity to self-correct. By the time they finally speak up or exit, the relationship is already severely damaged.^[18]

V. The Incredibility of Commitment: Why Appeasement Is Never Enough

A key insight from game theory is: the appeasement strategy cannot establish credible commitment.^[19]

When a decision-maker continuously satisfies a demander's requests, they are effectively sending a signal: "I fear conflict, and I will continue to capitulate." This signal has two consequences:

• For the demander: It reinforces the motivation to keep demanding
• For the cooperator: It conveys the message "your contributions don't matter"

More importantly, appeasement cannot buy "gratitude" or "goodwill." Game theory research shows: forced concessions are not perceived as "goodwill" because the other party knows you had no choice.^[20]

This explains why many decision-makers are puzzled: "I've given so much — why is the other party still unsatisfied?" The answer: because you gave too easily. Gains obtained without cost do not bring satisfaction — they only raise expectations for the next time.^[21]

5.1 The Mathematics of Adaptive Expectations

Let us analyze this dynamic using the framework of adaptive expectations.^[22]

Let the demander's "expected treatment" in period t be E_t. If the treatment provided by the decision-maker in period t is T_t, then:

E_t+1 = E_t + α(T_t − E_t)

where α is the "adaptation speed." This means:

• If this period's treatment exceeds expectations (T_t > E_t), next period's expectations rise
• If this period's treatment falls below expectations (T_t < E_t), the demander feels "deprived"

Under the appeasement strategy, the decision-maker continuously meets (or even exceeds) the demander's requests, causing E_t to rise steadily. But resources are finite — eventually, the decision-maker cannot keep up with ever-rising expectations. At that point, even though the treatment T_t provided is already substantial, because it falls below E_t, the demander still feels "dissatisfied."^[23]

This is why the appeasement strategy ultimately fails: it creates an expectation trajectory that cannot be sustainably met.

VI. The Absence of Strategic Gratitude: Why Demanders Don't Say Thank You

A common puzzle is: why, after receiving so much, do demanders not only fail to express gratitude but often criticize the "givers"?

Game theory offers several explanations:

6.1 Resolving Cognitive Dissonance

Psychologist Leon Festinger's cognitive dissonance theory states that when behavior is inconsistent with self-perception, people adjust their cognition to eliminate the discomfort.^[24]

For the demander:

• Behavior: I have been demanding, complaining, and requesting special treatment
• Self-perception: I am a good person
• Cognitive dissonance: A good person wouldn't do this...
• Resolution: Redefine the situation — "I'm not demanding; I'm fighting for what I deserve"

To maintain this narrative, the demander needs to recast the giver as someone who "owes" them. This explains why demanders often engage in "selective memory" — remembering their own contributions while forgetting their demands.^[25]

6.2 Self-Serving Bias

More broadly, people tend to attribute success to themselves and failure to their environment (self-serving bias).^[26]

Applied to organizational settings:

• Benefits the demander receives → "This is what I deserve"
• Difficulties the demander encounters → "This is someone else's fault"
• The giver's contributions → Underestimated or ignored
• Any "non-compliance" from the giver → Magnified as "betrayal"

This creates a distorted narrative: the demander genuinely believes they are the "victim," even when objective facts are completely to the contrary.^[27]

6.3 The "Turning" Upon Departure

A particularly interesting phenomenon is that when demanders ultimately choose to leave an organization, they often launch fierce criticism against those who once gave to them.

This can be explained by the reverse of "escalation of commitment."^[28] When a person has invested substantial resources in a relationship, they need to believe the relationship was "worth it." But when they decide to leave, they need to reinterpret history to prove that "leaving was the right choice."

Therefore:

• Past "being cared for" is reinterpreted as "being controlled"
• The former "giver" is recast as the "oppressor"
• Past "goodwill" is reinterpreted as "having ulterior motives"

This is why the demander's departure is often accompanied by a dramatic "turning" and "accusations" — it is the psychological need to maintain self-consistency.^[29]

VII. System Collapse: Why Appeasement Cannot Buy Stability

Let us synthesize the preceding analysis to understand why the appeasement strategy ultimately leads to system collapse.

7.1 Unstable Equilibrium

In game theory, a "stable equilibrium" is a state in which no party has an incentive to unilaterally change their strategy.^[30]

The equilibrium created by the appeasement strategy is unstable because:

• The demander's requests keep escalating (because they are continuously met)
• The decision-maker's resources are gradually depleted (because of continuous giving)
• The cooperator's patience is gradually worn down (because they are continuously overlooked)
• Eventually, some link in the system will break

The break can occur anywhere:

• The decision-maker can no longer keep up → The demander "turns" and leaves
• The cooperator's patience runs out → The cooperator exits or rebels
• Resources are completely exhausted → The entire system collapses

7.2 The "Appeasement–Eruption" Cycle

A common pattern is the "appeasement–eruption" cycle:^[31]

1. Appeasement phase: The decision-maker tries their best to satisfy the demander and suppress conflict
2. Tension accumulation: Unresolved problems continue to pile up, but the surface remains peaceful
3. Eruption: Some triggering event causes the suppressed tension to explode
4. Repair attempt: The decision-maker promises change; the demander expresses "forgiveness"
5. Return to appeasement: But the root cause of the problem has not changed...

With each cycle, the baseline level of tension rises, until the final eruption is beyond repair.

VIII. Lessons for Institutional Design: How to Break the Vicious Cycle

If the appeasement strategy is doomed to fail, what is a better alternative? Game theory and mechanism design offer some principles:^[32]

8.1 Reward Contribution, Not Complaint

The most fundamental principle is: organizations should reward "what people do," not "what people say".

• Establish measurable contribution metrics
• Explicitly link contributions to rewards
• Do not give special responses to "complaints" (unless the complaint points to a genuine problem)

This requires decision-makers to consciously resist the intuitive response of giving in to whoever complains the loudest.^[33]

8.2 Set Boundaries Early

Game theory research shows: in repeated games, early behavior shapes expectations about future behavior.^[34]

This means:

• Set clear boundaries early in the relationship
• Refuse unreasonable demands early on
• Let all members know: the rules apply equally to everyone

The cost of early "conflict" is far lower than the cost of later "collapse."

8.3 Credible Commitment

Decision-makers need to establish "credible commitment": unreasonable demands will not be met, no matter how much the other party complains or threatens.^[35]

This requires:

• Clearly declaring the rules
• Consistently enforcing the rules (without making exceptions for individuals)
• Bearing the cost of early conflict (to avoid even greater costs later)

8.4 Protect the Cooperators

The long-term health of an organization depends on retaining its cooperators. Therefore:^[36]

• Proactively identify and thank "silent contributors"
• Regularly check whether their needs are being met
• Ensure their contributions are seen, recorded, and rewarded
• Don't wait until they speak up or leave to notice them

8.5 Recognize the "Unsatisfiable"

Finally, decision-makers need to recognize a reality: some people simply cannot be satisfied.^[37]

For such demanders, the correct strategy is not to "give more," but rather:

• Set clear boundaries
• Be prepared to bear the cost of their "departure" or "turning"
• Understand that this cost may be necessary — and likely lower than the long-term cost of continued appeasement

IX. Conclusion: Incentive Structures Determine the Fate of Systems

Returning to the original question: why is "the squeaky wheel gets the grease" institutional failure?

From the perspective of game theory and economics, the answer is clear: when a system rewards demanding and punishes contributing, it gradually evolves toward a pathological equilibrium — demanders become ever more rapacious, cooperators become ever more disengaged, until the system collapses.^[38]

This is not because decision-makers are "bad" or "biased." In many cases, decision-makers act from good intentions — they want to "keep the peace," "avoid conflict," and "make everyone happy." But they fail to realize that their strategy is creating an unsustainable system.

For cooperators, this analysis offers an important insight: your silence is not the cause of being overlooked, but the result — it is a product of the system's incentive structure. Changing this structure requires not more giving, but clearer boundaries and earlier voice.^[39]

For decision-makers, this analysis is a warning: short-term peace is purchased at the cost of long-term stability. Every concession to a demander erodes the organization's foundation. True leadership is not about making everyone "satisfied" but about building a fair, sustainable system — even if this means bearing some short-term conflict costs.^[40]

"The most dangerous organization is not one with conflict, but one that suppresses conflict — because suppressed conflict erupts at the worst moment, in the worst way."

A healthy organization is not one without conflict, but one that handles conflict fairly. This requires courage, wisdom, and a deep understanding of long-term consequences. I hope this analysis provides a thinking framework for those facing this dilemma — whether you are a decision-maker or that "silent contributor."

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