Economics, 3rd Edition

TABLE 1.2

Latest Thinking in Economics – Incentives

One of the Ten Principles of 

Economics is that people respond 

to incentives. This should not be an 

entirely surprising principle and may 

seem like an example of  economists 

making common sense sound more 

complex. However, the reality is 

that the complex nature of human 

beings does make the introduc-

tion and effect of incentives much 

more challenging than might at first 

appear.

Gneezy et al. highlight some of 

these issues (Gneezy, U. Meier, S. 

and Ray-Biel, P. (2011) ‘When and 

why incentives (don’t) work to modify 

behaviour’. In Journal of Economic 

Perspectives. 25:4, 191–210). They 

point out that incentives may work 

better in certain circumstances than 

in others and policymakers need to 

consider a wide variety of issues when 

deciding on putting incentives in place.

First of all, they have to consider 

the type of behaviour to be changed. 

For example, society might want to 

encourage its citizens to do more, 

what Gneezy et al. call ‘prosocial’ 

behaviour such as donating blood, 

sperm or organs, increasing the