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 cooperation 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.
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:
- 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.
- 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.
- 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.