Incentives

Supplementary resources by topic. Incentives is one of 51 key economics concepts identified by the National Council on Economic Education (NCEE) for high school classes.

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Definitions and Basics

Incentives Matter

Incentives matter. The most famous example in economics is the idea of the demand curve—when something gets more expensive, people buy less of it. When it gets less expensive, people buy more of it....

Demand

Concise Encyclopedia of Economics

The main reason economists believe so strongly in the law of demand is that it is so plausible, even to noneconomists. Indeed, the law of demand is ingrained in our way of thinking about everyday things. Shoppers buy more strawberries when they are in season and the price is low. This is evidence for the law of demand: only at the lower, in-season price are consumers willing to buy the higher amount available. Similarly, when people learn that frost will strike orange groves in Florida, they know that the price of orange juice will rise. The price rises in order to reduce the amount demanded to the smaller amount available because of the frost. This is the law of demand. We see the same point every day in countless ways. No one thinks, for example, that the way to sell a house that has been languishing on the market is to raise the asking price. Again, this shows an implicit awareness of the law of demand: the number of potential buyers for any given house varies inversely with the asking price....

The Power of Incentives

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The surest way to get people to behave in desirable ways is to reward them for doing so—in other words provide them with incentives. This is so obvious that you might think it hardly deserves mention. But it does.

You might say that people shouldn't have to be rewarded (bribed) to do desirable things. Even when you acknowledge that incentives are necessary, it is not obvious how to establish the ones that motivate desirable action.

In one of my classes, I recently encountered the emotional resistance some people have to using incentives to accomplish good things. I was pointing out that the elephant populations in Zimbabwe and South Africa were expanding because policies there allow people to profit from maintaining elephant herds. A student who had stressed his environmental sensitivity responded that he would rather not see the elephant saved if the only way to do so was by relying on people's greed. In other words, he was willing to stand on principle as long as only the elephants suffered the consequences. His principle, one that I suspect was shared by others in the class, was that good things should be motivated by compassion and concern, not self-interest....

In the News and Examples

Life-Saving Incentives: Consequences, costs and solutions to the organ shortage

Our current organ procurement system relies solely on altruism to motivate donation. Altruism is a fine thing but it is in short supply....

Michael Lewis on the Hidden Economics of Baseball and Football

Michael Lewis talks about the economics of sports—the financial and decision-making side of baseball and football—using the insights from his bestselling books on baseball and football: Moneyball and The Blind Side. Along the way he discusses the implications of Moneyball for the movie business and other industries, the peculiar ways that Moneyball influenced the strategies of baseball teams, the corruption of college football, and the challenge and tragedy of kids who live on the streets with little education or prospects for success....

Slavery, Snakes, and Switching: The Role of Incentives in Creating Unintended Consequences

In the developed world, we like to think of slavery as a bad memory. But slavery persists to this day, particularly in some parts of Africa, most notably the Sudan. Raiding parties steal children from their home villages and transport them for sale in slave markets many miles away. In the 1990s, when news of this ongoing tragedy came to the developed world, well-intentioned people formed charitable foundations that raised money for slave redemption—that is, buying people out of slavery.

Did these charitable efforts do any good? Certainly, some people are free now who might otherwise of have lived their whole lives in slavery. But there is strong evidence to suggest that slave redemption made the overall situation worse. As journalist Richard Miniter reported in a 1999 article in the Atlantic Monthly, the high prices offered by relatively rich Americans increased the demand for slaves, turned the slave trade into an even more lucrative business, and thereby gave raiders an incentive to conduct even more slave raids. If not for the activities of Western charitable organizations, many of the redeemed slaves might never have been enslaved in the first place!...

Boettke on Katrina and the Economics of Disaster

Pete Boettke of George Mason University talks about the role of government and voluntary efforts in relieving suffering during and after a crisis such as Katrina. Drawing on field research he is directing into the aftermath of Hurricane Katrina, Boettke highlights the role of what he calls "civil society"—the informal, voluntary associations we make as individuals with each other to create community....

Volunteers of America: Lessons from the New Contract Army

Being forced to rely on volunteers alters completely the way in which politicians and bureaucrats have to think about warfare in the first place. Economics predicts that the need to hire soldiers changes the incentives facing politicians to commit America to war....

It is highly unlikely that Vietnam would have happened without conscription. Not enough men would have enlisted voluntarily at the going wage. As the saying at the time went, "What if they held a war and nobody came?" Of course, wages could have been raised sufficiently, but the cost would have been astronomical...

A Little History: Primary Sources and References

Happiness, Progress and the "Vanity of the Philosopher" (Part 2): The Trial of Annie Besant and Charles Bradlaugh

The popular interpretation of Malthusian population theory is one of inexorable tragedy—population will inevitably outstrip the food supply leading to famine and death. This caricature of Thomas Robert Malthus neglects his view that individuals could make choices to avoid tragedy, using their uniquely human gifts of foresight and calculation.

Even though Malthus was aware of the sexual temptation associated with an unmarried state, Malthus advocated delay of marriage to prudentially restrain population....

Of the general Checks to Population, and the Mode of their Operation

An Essay on the Principle of Population

These checks to population, which are constantly operating with more or less force in every society, and keep down the number to the level of the means of subsistence, may be classed under two general heads—the preventive, and the positive checks.

The preventive check, as far as it is voluntary, is peculiar to man, and arises from that distinctive superiority in his reasoning faculties, which enables him to calculate distant consequences. The checks to the indefinite increase of plants and irrational animals are all either positive, or, if preventive, involuntary. But man cannot look around him, and see the distress which frequently presses upon those who have large families; he cannot contemplate his present possessions or earnings, which he now nearly consumes himself, and calculate the amount of each share, when with very little addition they must be divided, perhaps, among seven or eight, without feeling a doubt whether, if he follow the bent of his inclinations, he may be able to support the offspring which he will probably bring into the world.... Will he not lower his rank in life, and be obliged to give up in great measure his former habits? Does any mode of employment present itself by which he may reasonably hope to maintain a family? Will he not at any rate subject himself to greater difficulties, and more severe labour, than in his single state? Will he not be unable to transmit to his children the same advantages of education and improvement that he had himself possessed?... [pars. I.II.3-4]

a selection from An Inquiry into the Nature and Causes of the Wealth of Nations

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.... [par. I.2.2]

Advanced Resources

The Economics of the Tenure System

Tenure plays a valuable role in the operation of most colleges and universities, but for a reason quite different from those usually advanced in its defense.

Incentives

On this page:

Definitions and Basics

In the News and Examples

A Little History: Primary Sources and References

Advanced Resources

Related Topics