Editing Incentive (section)

=== Misaligned incentives ===
A misaligned incentive refers to a situation where the goals of different parties involved in a particular situation such as a firm or system are not aligned and may even conflict with each other. Misaligned incentives can potentially arise in many other contexts, such as in government policies, healthcare, education, and environmental regulations. Principals within a firm want their agents to work for the principals' best interests, but agents often have different goals than the principals.<ref>{{Cite journal |last=Prendergast |first=Canice |date=March 1999 |title=The Provision of Incentives in Firms |journal=Journal of Economic Literature |volume=37 |issue=1 |pages=7–63 |doi=10.1257/jel.37.1.7}}</ref> Due to this problem of misaligned incentives, firms must design compensation plans to induce workers to act in the firm's best interest and generate a level of output that maximizes the firm's profits.<ref name=":3" /> The problem of [[asymmetric information]] means that the principal does not know exactly how to motivate its agents to act in the firm's best interests. Consequently, compensation plans are difficult for firms to design.<ref name=":5">{{Cite web |title=Asymmetric Information: The Principal-Agent Problem |url=http://people.umass.edu/resec712/documents/Lecture7AsymmetricInformation.pdf |url-status=dead |archive-url=https://web.archive.org/web/20151123003015/http://people.umass.edu/resec712/documents/Lecture7AsymmetricInformation.pdf |archive-date=2015-11-23}}</ref> The [[Principal–agent problem|principal-agent theory]] is used as the guiding framework when aligning incentives with the employee's effort to obtain the efficient level of output for the firm.<ref name=":3" /> For example, a manager may want a certain level of output from an employee but does not know the capabilities of the employee in the presence of imperfect monitoring, and to achieve the best outcome, an optimal incentive scheme must be designed to motivate the worker to increase their productivity.<ref name=":5" /> Research shows that if a principal offers a high incentive, the agent will also recompense with a higher effort.<ref>{{Cite journal |last1=Irlenbusch |first1=Bernd |last2=Sliwka |first2=Dirk |date=September 2005 |title=Incentives, Decision Frames, and Motivation Crowding Out – an Experimental Investigation |journal=IZA Discussion Paper No. 1758 |ssrn=822866 |doi=10.2139/ssrn.822866|s2cid=16424059 |url=https://econpapers.repec.org/RePEc:iza:izadps:dp1758 |hdl=10419/33245 |hdl-access=free }}</ref>

However, in this relationship, an informal advantage usually exists among agents over the principal. A [[moral hazard]] could be present where principals are unable to know for sure if agents are giving their all on a delegated task, and an [[adverse selection]] could exist as principals usually have insufficient knowledge on the agents’ capabilities and face difficulties in selecting the agent best suited for a task.<ref name=":13">{{Cite journal |last1=Braun |first1=Dietmar |last2=Guston |first2=David H |date=October 2003 |title=Principal-agent theory and research policy: an introduction |journal=Science and Public Policy |volume=30 |issue=5 |pages=302–308 |doi=10.3152/147154303781780290 |s2cid=144005311 |issn=0302-3427|url=https://serval.unil.ch/resource/serval:BIB_7A523369F205.P001/REF.pdf }}</ref> In instances where principals have contradicting goals with the agents, agents would have an incentive to shirk and to leak information to competing principals.<ref>{{Cite journal |last1=Waterman |first1=Richard W. |last2=Meier |first2=Kenneth J. |date=1998 |title=Principal-Agent Models: An Expansion? |journal=Journal of Public Administration Research and Theory |volume=8 |issue=2 |pages=173–202|doi=10.1093/oxfordjournals.jpart.a024377 |doi-access=free }}</ref> Self-interested agents may also want to maximize their own interest by lying <ref>{{Cite book |last=Williamson |first=Oliver E. |title=The economic institutions of capitalism: firms, markets, relational contracting |date=1985 |publisher=The Free Press |isbn=978-0-684-86374-0 |oclc=12216444}}</ref> or deliberately hiding information from the principal to decrease their workload.<ref name=":13" />