Theory of Incentives

The Theory of Incentives explores how individuals respond to rewards and penalties to influence their behavior. It suggests that people’s decisions are guided by comparing potential benefits with associated costs or risks. By designing appropriate incentives—such as bonuses, commissions, or penalties—organizations and policymakers can encourage desirable actions and discourage undesired ones. This theory helps in understanding how to align individual motivations with broader goals, ensuring that people's actions contribute positively to organizational or societal outcomes.