Incentives

An incentive is something that motivates an individual to perform an action. The study of incentive structures is central to the study of all economic activities (both in terms of individual decision-making and in terms of co-operation and competition within a larger institutional structure). Economic analysis, then, of the differences between societies (and between different organizations within a society) largely amounts to characterizing the differences in incentive structures faced by individuals involved in these collective efforts. Ultimately, incentives aim to provide value for money and contribute to organizational success. As such the design of incentive systems is a key management activity.

Incentives can be classified according to the different ways in which they motivate agents to take a particular course of action. One common and useful taxonomy divides incentives into four broad classes:

There is another common usage in which incentive is contrasted with coercion, as when economic moralists contrast incentive-driven work – such as entrepreneurship, employment, or volunteering motivated by remunerative, moral, or personal incentives – with coerced work – such as slavery or serfdom, where work is motivated by the threat or use of violence, pain and/or deprivation. In this usage, the category of "coercive incentives" is excluded. For the purposes of this article, however, "incentive" is used in the broader sense defined above.

The categories mentioned above do not exhaust every possible form of incentive that an individual person may have. In particular, they do not encompass the many other forms of incentive – which may be roughly grouped together under the heading of personal incentives – which motivate an individual person through their tastes, desires, sense of duty, pride, personal drives to artistic creation or to achieve remarkable feats, and so on. The reason for setting these sorts of incentives to one side is not that they are less important to understanding human action – after all, social incentive structures can only exist in virtue of the effect that social arrangements have on the motives and actions of individual people. Rather, personal incentives are set apart from these other forms of incentive because the distinction above was made for the purpose of understanding and contrasting the social incentive structures established by different forms of social interaction. Personal incentives are essential to understanding why a specific person acts the way they do, but social analysis has to take into account the situation faced by any individual in a given position within a given society – which means mainly examining the practices, rules, and norms established at a social, rather than a personal, level.

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