Incentive

An incentive is a contingent motivator. Traditional incentives are extrinsic motivators which reward actions to yield a desired outcome. The effectiveness of traditional incentives has changed as the needs of Western society have evolved. While the traditional incentive model is effective when there is a defined procedure and goal for a task, Western society started to require a higher volume of critical thinkers, so the traditional model became less effective. Institutions are now following a trend in implementing strategies that rely on intrinsic motivations rather than the extrinsic motivations that the traditional incentives foster. An incentive is a contingent motivator. Traditional incentives are extrinsic motivators which reward actions to yield a desired outcome. The effectiveness of traditional incentives has changed as the needs of Western society have evolved. While the traditional incentive model is effective when there is a defined procedure and goal for a task, Western society started to require a higher volume of critical thinkers, so the traditional model became less effective. Institutions are now following a trend in implementing strategies that rely on intrinsic motivations rather than the extrinsic motivations that the traditional incentives foster. Some examples of traditional incentives are letter grades in the formal school system, and monetary bonuses for increased productivity in the workplace. Some examples of the promotion of intrinsic motivation are Google allowing their engineers to spend 20% of their work time exploring their own interests, and the competency based education system. The study of incentive structures is central to the study of all economic activities (both in terms of individual decision-making and in terms of co-operation and competition within a larger institutional structure). Therefore, economic analysis of the differences between societies (and between organizations within a society) amounts to characterizing the differences in incentive structures faced by individuals involved in these collective efforts. Incentives aim to provide value for money and contribute to organizational success. 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 four broad classes: 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, pain and/or deprivation. In this usage, the category of 'coercive incentives' is excluded. For the purposes of this article, however, 'incentive' is used in the broader sense defined above. The categories mentioned above do not exhaust every possible form of incentive that an individual person may have. In particular, they do not encompass the many other forms of incentive – which may be roughly grouped together under the heading of personal incentives – which motivate an individual person through their tastes, desires, sense of duty, pride, personal drives to artistic creation or to achieve remarkable feats, and so on. The reason for setting these sorts of incentives to one side is not that they are less important to understanding human action – after all, social incentive structures can only exist in virtue of the effect that social arrangements have on the motives and actions of individual people. Rather, personal incentives are set apart from these other forms of incentive because the distinction above was made for the purpose of understanding and contrasting the social incentive structures established by different forms of social interaction. Personal incentives are essential to understanding why a specific person acts the way they do, but social analysis has to take into account the situation faced by any individual in a given position within a given society – which means mainly examining the practices, rules, and norms established at a social, rather than a personal, level. The study of economics in modern societies is mostly concerned with remunerative incentives rather than moral or coercive incentives – not because the latter two are unimportant, but rather because remunerative incentives are the main form of incentives employed in the world of business, whereas moral and coercive incentives are more characteristic of the sorts of decisions studied by political science and sociology. A classic example of the economic analysis of incentive structures is the famous Walrasian chart of supply and demand curves: economic theory predicts that the market will tend to move towards the equilibrium price because everyone in the market has a remunerative incentive to do so: by lowering a price formerly set above the equilibrium a firm can attract more customers and make more money; by raising a price formerly set below the equilibrium a customer is more able to obtain the good or service that she wants in the quantity she desires. In cases with asymmetric information where one user knows some relevant fact about another, principal-agent theory is the guiding framework in optimizing incentive of choice. The classic example for a situation for asymmetric information can be that of a manager and worker, where manager may want a certain level of output from the worker. The manager does not know the capabilities of the worker, and to achieve the best outcome, an optimal scheme of incentive may be chosen to motivate the worker to give their best performance. An optimal incentive is one that accomplishes the stated goal. If the goal is to maximize profits, then an optimal incentive will be one that encourages workers to balance the risk imposed by the employee for poor performance and the marginal disutility of effort. A weak incentive is any incentive below this level.