Incentive

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Etymology

late Middle English < LL incentīvus provocative, L: setting the tune, equiv. to incent ( us ) (ptp. of incinere to play (an instrument, tunes); in- in-2 + -cinere, comb. form of canere to sing) + -īvus -ive

Definitions

  • 1. something that incites or tends to incite to action or greater effort, as a reward offered for increased productivity.
  • 2.inciting, as to action; stimulating; provocative.

Description

In economics and sociology, an incentive is any factor (financial or non-financial) that enables or motivates a particular course of action, or counts as a reason for preferring one choice to the alternatives. It is an expectation that encourages people to behave in a certain way. Since human beings are purposeful creatures, the study of incentive structures is central to the study of all economic activity (both in terms of individual decision-making and in terms of co-operation and competition within a larger institutional structure). Economic analysis, then, of the differences between societies (and between different organizations within a society) largely amounts to characterizing the differences in incentive structures faced by individuals involved in these collective efforts. Ultimately, incentives' aim to provide value for money and contribute to organizational success.[2]

Categories

Incentives can be classified according to the different ways in which they motivate agents to take a particular course of action. One common and useful taxonomy divides incentives into three broad classes:

  • 1. Remunerative incentives (or financial incentives) are said to exist where an agent can expect some form of material reward — especially money — in exchange for acting in a particular way.
  • 2. Moral incentives are said to exist where a particular choice is widely regarded as the right thing to do, or as particularly admirable, or where the failure to act in a certain way is condemned as indecent. A person acting on a moral incentive can expect a sense of self-esteem, and approval or even admiration from his community; a person acting against a moral incentive can expect a sense of guilt, and condemnation or even ostracism from the community.
  • 3. Coercive incentives are said to exist where a person can expect that the failure to act in a particular way will result in physical force being used against them (or their loved ones) by others in the community — for example, by inflicting pain in punishment, or by imprisonment, or by confiscating or destroying their possessions.

(There is another common usage in which incentive is contrasted with coercion, as when economic moralists contrast incentive-driven work—such as entrepreneurship, employment, or volunteering motivated by remunerative, moral, or personal incentives—with coerced work—such as slavery or serfdom, where work is motivated by the threat or use of violence. In this usage, the category of "coercive incentives" is excluded.[1]