incitamentproblem

An incitamentproblem, or incentive problem, is a situation in which the incentives facing a decision-maker or actor do not align with the intended objectives of another party, leading to suboptimal or unintended behavior. The core issue is often information asymmetry between a principal who delegates tasks and an agent who performs them, combined with incomplete contracts or misaligned rewards. Incentives can be positive (rewards for desirable outcomes) or negative (penalties for failures), and misalignment can produce moral hazard, risk-taking, or strategic behavior that undermines the social or organizational goals.

Common settings include corporate governance, public policy, and service provision. In corporate governance, executives may pursue short-term earnings or personal bonuses rather than long-term shareholder value. In public programs, incentives may encourage participants to game the system or to seek benefits without producing corresponding outcomes, such as enrollment-driven welfare programs or subsidies without performance controls. Environmental or healthcare policies can suffer when incentives favor cost-cutting over quality or innovation.

Addressing incentive problems involves shaping contracts, monitoring, and institutions to align interests. Tools include performance-based pay with credible measurement, transparent reporting, benchmarking, penalties for non-performance, diversification of decision rights, and competitive pressure. Well-designed incentives should be verifiable, aligned with long-term goals, and robust to attempts at gaming.

Incentive problems are a central topic in contract theory, economics, and organizational design and are closely related to concepts such as principal-agent problems, moral hazard, and adverse selection.