The Basic Idea
If you’ve ever had a salesperson pressure you into buying something, you know all about incentives. Often, salespeople make additional money based on how much they can sell – an incentivization tactic known as “working on commission.” Put simply, an incentive is something that motivates people – in the cases of sales, to sell as much as possible.
Incentives can be remunerative, like a commission, such that they motivate people to do something in order to get some sort of reward. They can also be moral, like doing volunteer work, which brings along a boost in self-esteem and possible praise from others. Coercive incentives occur when we are motivated to do something because the consequences of not doing it could be severe, such as respecting authority for fear of being fired or getting in trouble.1
Incentives and motivation are fundamentally intertwined, such that the incentive theory of motivation suggests that incentives give rise to motivation.2 This theory also suggests that different people are motivated by different incentives. An incentive will only boost motivation if what is being offered as an incentive is of value to the individual.3
Economics, when you strip away the guff and mathematical sophistry, is largely about incentives.
– John Cassidy in How Markets Fail: The Logic of Economic Calamities
