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Encyclopedia > Incentives

In economics, an incentive in anything that provides a motive for a particular course of action — that counts as a reason for preferring one choice to the alternatives. 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. Economics (deriving from the Greek words οίκω [oeko], house, and νέμω [nemo], distribute) is the social science that studies the allocation of scarce resources through measurable variables. ... Co-operation refers to the practice of people or greater entities working in common with commonly agreed-upon goals and possibly methods, instead of working separately in competition. ... Competition characterises a biochemical, ecologic, economic, political, or sporting activity whereby two or more individuals or groups strive antagonistically against one another for some reward. ...


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: Taxonomy (from Greek ταξινομία from the words taxis = order and nomos = law) may refer to either a hierarchical classification of things, or the principles underlying the classification. ...

  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 her 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 her (or her loved ones) by others in the community — for example, by inflicting pain in punishment, or by imprisoning her, or by confiscating or destroying her 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. Of course in this usage, the category of "coercive incentives" is excluded.) Money is a marketable good or token that acts as a store of value, a medium of exchange and a unit of account. ... In modern parlance, to ostracize means to exclude someone from society or from a community, by not communicating with or even noticing them, similar to shunning. ... Coercion is the practice of compelling a person to act by employing threat of force. ... Entrepreneurship is the practice of starting new organizations, particularly new businesses. ... Employment is a contract between two parties, one being the employer and the other being the employee. ... This group of political volunteers is working to promote voter turn-out. ... A monument celebrating the emancipation of slaves in the British Empire in 1834, erected in Victoria Tower Gardens, Millbank, Westminster, London Wiktionary has a definition of: Slavery Slavery can mean one or more related conditions which involve control of a person against his or her will, enforced by violence or... Costumes of Slaves or Serfs, from the Sixth to the Twelfth Centuries, collected by H. de Vielcastel, from original Documents in the great Libraries of Europe. ...


These categories do not, by any means, 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 her 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 she does, 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.


It's also worth noting that these categories are not necessarily exclusive; one and the same situation may, in its different aspects, carry incentives that come under any or all of these categories. In modern American society, for example, economic prosperity and social esteem are often closely intertwined; and when the people in a culture tend to admire those who are economically successful, or to view those who are not with a certain amount of contempt (see also: classism, Protestant work ethic), the prospect of (for example) getting or losing a job carries not only the obvious remunerative incentives (in terms of the effect on the pocketbook) but also substantial moral incentives (such as honor and respect from others for those who hold down steady work, and disapproval or even humiliation for those who don't or can't). Classism (a term formed by analogy with racism) is any form of prejudice or oppression against people who are in, or who are perceived as being like those who are in, a lower social class (especially in the form of lower socioeconomic status) within a class society. ... The Protestant work ethic is a biblically based teaching on the necessity of hard work, perfection and the goodness of manual labor. ...


Positive aspects of incentive

Quite intuitively, if there is no economic, social, or personal incentive for any individual to do work, it will not get done. Therefore, a society must provide incentive for the work necessary for its own maintenance.


Likewise, a company or organization that provides incentives for its members to improve said institution will, usually, have better results. One that provides no or little incentive will suffer from weak morale.


Negative aspects of incentive

Incentive is very much a double-edged sword. For example, corporate policies — especially of the "extreme incentive" variant popular during the 1990s — with the goal of encouraging productivity may not have the intended effect. For example, stock options, intended to boost CEO productivity by tying CEO compensation to company performance, have been blamed for many of the falsified earnings reports and public statements in the late 1990s and early 2000s. A corporation is a legal entity (distinct from a natural person) that often has similar rights in law to those of a Civil law systems may refer to corporations as moral persons; they may also go by the name AS (anonymous society) or something similar, depending on language (see below). ... Events and trends Technology Explosive growth of the Internet; decrease in the cost of computers and other technology Reduction in size and cost of mobile phones leads to a massive surge in their popularity Year 2000 problem (commonly known as Y2K) Microsoft Windows operating system becomes virtually ubiquitous on IBM... A stock option is a specific type of option with a stock as the underlying instrument (the security that the value of the option is based on). ... Chief Executive Officer (CEO) is the job of having the ultimate executive responsibility or authority within an organization or corporation. ... Major controversy over U.S. presidential election, 2000 September 11, 2001 Terrorist Attack on New Yorks World Trade Center and Virginias Pentagon killing over 3000 people. ...


Throughout the 1990s and 2000s, many corporations have sought to increase individual incentives by increasing the sizes of bonuses (to the point where they exceed salaries, sometimes by a factor as high as 10) for star performers while also laying off large proportions of their workforce, hoping to cultivate fear factor-related gains. The most extreme version of this is "forced ranking", a scheme by which workers are annually ranked and a set proportion (between 10 and 15%, usually) automatically fired. The results of these programs are mixed, but in extreme cases, usually negative. Downsizing refers to layoffs initiated by a company in order to cut labor costs by reducing the size of the company. ... Fear Factor is an American television game show (on NBC) which pits contestants (usually three men and three women) against each other to complete a series of stunts better and/or quicker than all the other contestants. ...


While competition among firms has often beneficial results, lowering prices and encouraging innovation, competition within firms has almost uniformly negative results. Designed to encourage production, extreme incentive schemes actually create a cutthroat working environment where office politics dominate and actually overshadow the productive goals of the company. An example of this is the now-deceased Enron corporation. According to David Callahan's The Cheating Culture, the environment at that company was so cutthorat (as a result of extreme incentive management) that employees feared leaving their computer terminals, worried that co-workers might steal information for their own purposes. Politics is the process and method of decision-making for groups of human beings. ... Enron Corporation Enron Corporation is an energy trading and communications company based in Houston, Texas that employed around 21,000 people in mid-2001 (before bankruptcy). ... David Callahan is the author of The Cheating Culture, a nonfiction work on the subject of unethical behavior in American society. ... The Cheating Culture: Why More Americans Are Doing Wrong to Get Ahead is a nonfiction book, authored by David Callahan and published by Harcourt in 2004. ...


Incentive in economics

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 bid formerly set below the equilibrium a customer is more able to obtain the good or service that she wants in the quantity she desires. Similarly, the study of the effects of monopoly or perfect competition on market prices can be seen as an analysis of the different remunerative incentive structures created by different market conditions: in a monopolistic market, monopoly profits give the monopolistic firm a significant incentive to set prices above equilibrium; whereas in conditions of perfect competition there is no remunerative incentive for a customer to accept a good at a higher price than the equilibrium price (and thus there is an intense incentive for firms to sell at the equilibrium — customers have no incentive at all to buy at above the equilibrium price, so firms that set prices above the equilibrium will make no money at all). Niccolò Machiavelli, ca 1500, became the key figure in realistic political theory, crucial to political science Political Science is the systematic study of the allocation and transfer of power in decision making. ... Sociology is the study of the social lives of humans, groups and societies. ... Marie-Ésprit-Léon Walras (December 16, 1834 in Évreux, France - January 5, 1910 in Clarens, near Montreux, Switzerland) was a French economist, considered by Joseph Schumpeter as the greatest of all economists. He was a mathematical economist associated with the creation of the general equilibrium theory. ... The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... For the 2002 science fiction movie see Equilibrium (2002 movie) Equilibrium or balance is any of a number of related phenomena in the natural and social sciences. ... In economics, a monopoly (from the Greek monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a kind of product or service. ... In economic theory, perfect competition is a market form in which no producer or consumer has the power to influence prices in the market. ... In economics, a firm is said to reap monopoly profits when a lack of viable market competition allows it to set its prices above the equilibrium price for a good or service without losing profits to competitors. ... In economic theory, perfect competition is a market form in which no producer or consumer has the power to influence prices in the market. ...


  Results from FactBites:
 
Incentive - Wikipedia, the free encyclopedia (977 words)
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).
A person acting on a moral incentive can expect a sense of self-esteem, and approval or even admiration from her community; a person acting against a moral incentive can expect a sense of guilt, and condemnation or even ostracism from the community.
Personal incentives are essential to understanding why a specific person acts the way she does, 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.
Incentive - definition of Incentive in Encyclopedia (884 words)
In economics, an incentive in anything that provides a motive for a particular course of action — that counts as a reason for preferring one choice to the alternatives.
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.
Throughout the 1990s and 2000s, many corporations have sought to increase individual incentives by increasing the sizes of bonuses (to the point where they exceed salaries, sometimes by a factor as high as 10) for star performers while also laying off large proportions of their workforce, hoping to cultivate fear factor-related gains.
  More results at FactBites »

 
 

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