The Theory of Incentives

The Theory of Incentives explores how people's motivations are influenced by rewards or penalties. Essentially, it suggests that individuals tend to act in ways that maximize their benefits or minimize their costs, depending on the incentives they face. For example, offering bonuses can motivate employees to work harder, while penalties deter undesirable behaviors. This theory helps explain decision-making in various settings, such as workplaces, markets, and organizations, by emphasizing the importance of designing appropriate incentives to align people's actions with desired goals.