Economic Theory of Incentives

The Economic Theory of Incentives suggests that people's behavior can be influenced by rewards or penalties. In simpler terms, individuals and businesses respond to incentives, whether they are financial, social, or personal. For example, offering bonuses can motivate employees to perform better, while fines can discourage harmful actions. This theory helps economists understand decision-making processes and the effects of policies or changes in market conditions. By aligning incentives with desired outcomes, we can encourage positive behavior and improve overall economic efficiency.