Incentive Structure

(noun)

The cumulative set of promised rewards and/or punishments that encourage actors to make a set of decisions.

Related Terms

Examples of Incentive Structure in the following topics:

  • Principle-Agent Problem

    • Incentive structures are used in business relationship in order to bridge the gap between best interests of the principal and the agent.
    • Principals offer various incentive structures, which are rewards or motivating factors that drive the agent to work in the best interest of the principal and complete tasks efficiently.
    • Incentive structures include price rates/commissions, profit sharing, and efficiency wages.

  • Individuals Respond to Incentives

    • Incentives are ways to encourage or discourage certain behaviors or choices.
    • 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 cooperation and competition within a larger institutional structure).
    • Incentives come in many other forms, however.
    • Natural Incentives: Things such as curiosity, mental or physical exercise, admiration, fear, anger, pain, joy, or the pursuit of truth, or the control over things in the world or people or oneself cause individuals to make certain decisions.

  • Incentivizing Saving and Investment

    • The government can incentivize savings and investment by changing the relative cost of taking each action.
    • There are a number of ways in through which a government can incentivize savings and investment.
    • The government can also incentivize savings and investment in a number of ways.

  • Investing in Research and Development

    • The government can do so by creating a good structure of intellectual property protection, called, broadly, patent law.
    • The government incentivizes the researches by making the research financially affordable (or more affordable).

  • Tax

    • Corrective taxes incentivize economic actors to reduce the production of goods or services generating negative externalities.

  • Efficiency Wage Theory

    • However, firms may choose to pay wages higher than the market-clearing equilibrium in order to incentivize increased worker productivity or to reduce turnover.

  • Regulation

    • Alternatively, it can implement market-based policies such as taxes and subsidies to incentivize private decision makers to change their own behavior.

  • Analysis of Price Discrimination

    • Incentives include rebates, bulk pricing, seasonal discounts, and frequent buyer discounts.

  • Open Market Operations

    • In addition to this direct interest rate channel, the fed funds rate influences many other interest rates in the economy and by so doing contributed to either incentivizing borrowing for growth or disincentivizing the same.

  • The Reserve Ratio

    • To carry out its responsibilities, the "Fed" uses policies including the reserve ratio to adjust the money supply to either incentivize growth or slow down growth, as needed.