Definition
Per (Gans et al.) an incentive is a reward or punishment that induces a person to act (or not to act) in a certain way. People respond to incentives.
Example:
- Fine if you’re driving under the influence of alcohol (punishment)
- Bonus to an employee if she/he exceeds expectations on her performance (reward)
- Government policies often use a set of incentives to encourage or discourage certain behaviours, for example taxes on cigarettes (punishment) or study benefits/allowances (reward)
Since rational people make decisions considering costs and benefits, they respond to incentives.
Work cited:
Gans, Joshua, et al. Principles of Microeconomics. South Melbourne, Victoria, Australia, Cengage Learning Australia, 2021.
Further reading here
