Incentive

An incentive is something that motivates a person to take a particular action or to behave in a certain way. Incentives influence choices by altering the perceived costs and benefits of different actions. They are used in many domains, including economics, business, law, policy, and psychology. Incentives can be monetary or non-monetary, positive or negative, and can target individuals or groups.

Monetary incentives include salaries, bonuses, commissions, subsidies, tax credits, price discounts, or fines. Non-monetary incentives include recognition, promotions, career development opportunities, flexible work arrangements, or social status. Incentives can be extrinsic, external rewards, or intrinsic, personal satisfaction or interest. The same incentive can have different effects depending on context, timing, and individual preferences.

Effective incentive design aligns the incentives of agents with desired outcomes, reducing information asymmetry and moral hazard. Key considerations include the measurability of performance, lag between actions and rewards, the size of the reward, and the potential for unintended consequences. Behavioral economics notes that incentives can crowd out intrinsic motivation or lead to perverse incentives if not well crafted.

Common uses include workplace performance pay to boost productivity; educational incentives such as test-score bonuses; environmental programs that reward reduced emissions; healthcare incentives that encourage adherence to treatment; and public programs that subsidize energy-efficient appliances.

Critics warn that incentives can distort decisions, widen inequality, or encourage gaming of systems. In some cases, emphasis on short-term results may undermine long-term goals. Ethical concerns arise when incentives encourage risk-taking or manipulate behavior without informed consent.