The Role of Incentives.

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The Role of Incentive by Lawrence W. Reed There’s a great deal of talk these days about incentives. An incentive is something which incites one to action. It is a spur, a motive, a provocation, a goad, a stimulus. Economists have long understood that the incentive to act comes from the prospect of the action yielding benefits to the actor. Because of that fact, particular incentives and incentive structures explain a very great deal of the economic world which swirls around us. People respond to incentives and to their opposite, disincentives. An individual will feel compelled to respond favorably to something which promises great personal benefit at low cost or risk. The same individual will tend to turn away from those things which deliver little or no benefit, especially if they do so only at high cost. He will positively shun those things which would set this progress back, much as a hot stove is disincentive to bare hands. Human choice is thus influenced by economic incentives and by changes in economic incentives. Let’s take a look at some current situations and see how this might explain some things. Many people complain today about the poor schooling their children receive in public schools. Declining test scores and a breakdown of discipline in the classroom, even as the costs of schooling rise, bear testimony to the failure of public education. Does this happen because public school teachers and administrators do not wish to provide a quality product? Not really. There is no reason to believe that public school teachers and administrators are any less desirous than other people that quality education be imparted. They are, however, responding to a peculiar set of incentive structures. I ask the reader, what would your performance be like if your business could legally draft customers and compel them, under threat of

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