The Incentive Effect

The incentive effect refers to how changes in policies or conditions influence people's motivation to act in certain ways. When rewards or penalties are introduced, individuals are more likely to adjust their behavior to maximize positive outcomes or avoid negative ones. For example, higher bonuses can motivate employees to work harder, while increased taxes might discourage certain activities. Essentially, the incentive effect highlights how the potential for gain or loss shapes decision-making and effort, aligning actions with desired goals or outcomes.