Incentives

In economics, we talk about incentives quite a bit. But what are incentives?

Incentives are rewards and punishments that motivate behavior.

You encounter incentives all the time. Think about what will happen if you don’t study for your economics exam. You might get a bad grade! But if you do devote time to learning the material, you’ll be rewarded with a good grade. Your grades are a familiar example of an incentive.

But incentives can be an even bigger deal than your grades – think life or death situations (no, a “D” on your econ midterm will not actually cause death).

In the late 18th century, the British government hired ship captains to transport convicted felons to Australia. Many prisoners did not the survive the voyages because the conditions on the ships were so terrible. The ones that did make it weren’t much better off, arriving sick, starved, and beaten.

The public was outraged. Parliament attempted to solve the problem with new regulations that required more humane treatment of the prisoners. But it didn’t work.

Why not? Incentives were simply not aligned -- the captains were paid whether prisoners arrived dead or alive. How did one ingenious economist propose to alter the incentives for the captains? Find out in the video!