Lecture Notes: Understanding Incentives

Definition of Incentives

• Incentives are rewards and punishments that motivate behavior.
• They are prevalent across various aspects of life and society.

Historical Example: British Convict Transportation (1787)

• Context: British government hired sea captains to transport convicted felons to Australia.
• Issues:
  • Awful conditions on ships.
  • High mortality rate: On one voyage, over a third of the prisoners died.
  • Survivors were often beaten, starved, and sick.
• Public Reaction:
  • Outrage over conditions.
  • Newspapers and clergy called for better treatment of prisoners.
  • British Parliament passed regulations for better prisoner treatment.
  • Despite efforts, the death rate remained high.

Economic Solution

• Proposed by an Economist:
  • Change in payment structure for sea captains.
  • Instead of payment per prisoner embarked, pay was given for each prisoner arriving alive.
• Outcome:
  • Immediate change in captains' incentives.
  • Prisoner survival rate increased to 99%.
  • Demonstrated that economic incentives can outperform moral appeals and regulations.

Key Takeaways

• Incentives are a crucial economic concept for predicting human behavior.
• Economic incentives can be more effective than sentiment or benevolence in achieving desired outcomes.

Further Learning

• Explore more on fundamental economic concepts like supply and demand.
• Test your knowledge on incentives and other economic principles.
• Check out additional educational resources at Marginal Revolution University.