On the Economic Theory of Incentives

The Economic Theory of Incentives suggests that individuals and organizations respond to rewards and penalties, shaping their behavior to achieve desired outcomes. It assumes people are motivated by self-interest, aiming to maximize their benefits. For example, higher wages motivate employees to work harder, while fines discourage undesirable actions. Effective incentives align personal motives with broader goals, influencing decisions and actions within markets and institutions. This theory helps design policies and systems that encourage positive behavior and improve efficiency by leveraging people's natural responsiveness to economic incentives.