Incentive
Divisions: An incentive is a powerful tool to influence certain desired behaviors or action often adopted by governments and businesses. 
Incentives can be broadly broken down into two categories: intrinsic incentives and extrinsic incentives. Overall, both types of incentives can be powerful tools often employ to increase effort and higher performance according to the "law of behavior."
Incentives are most studied in the area of personnel economics where economic analysts, such as those who take part in human resources management practices, focus on how firms make employees more motivated, through pay and career concerns, compensation and performance evaluation, to motivate employees and best achieve the firms' desired performance outcomes.

Intrinsic and extrinsic incentive: An intrinsic incentive is when a person is motivated to act in a certain way for their own personal satisfaction without seeking any external reward, nor facing any external pressure to perform the task. For instance, a singer who enjoys singing may be intrinsically motivated to spend several hours a day to improve their performance without receiving any recognition or awards from others. Often, intrinsic incentives are useful in increasing one's empowerment, utility level, and autonomy and can reinforce employees’ work involvement and commitment.
Intrinsic incentives and extrinsic incentives are both important in driving people's behavior. Experts believe that intrinsic incentives are stronger motivators compared to extrinsic incentives as they increase employees’ work engagement and genuine enjoyment of work. However, people's intrinsic motivation tends to decrease when they are offered too many extrinsic rewards. In order to maintain the action, constant incentives have to be provided. This is known as the Overjustification Effect.
While both types of incentive are a fundamental concept in economics that play a crucial role in motivating behavior, the extent to which and how they influence individual may depend on varies factors. Factors to consider may include the type of activity being incentivized, the individual's personal values and goals, and the context in which the incentive is offered. A well-designed incentive system should take into account to avoid unintended consequences and ensure that they align with the desired outcomes.
There are some parties who oppose the benefits of using extrinsic incentives and believe that they cause more harm than good. These opponents believe that the constant use of extrinsic incentives can lead to the crowding out of intrinsic incentives, which are also valuable performance motivators. When people are constantly being incentivized by external pressures, they neglect their intrinsic motives which could consequently be detrimental to their work ethic. Employees can become too comfortable with consistently gaining some reward for acting in a manner which is consistent with the interests of the firm. As a result, employees begin to believe that they deserve to earn rewards for doing certain things, not for the benefit of the firm but rather for their own benefit, which leads to them shirking if no extrinsic incentive is offered in return for high effort.
Nonetheless, incentives (both intrinsic and extrinsic) can be beneficial in altering a person's behavior and can be effectively used and executed within many different areas of life including in the workforce, in education and within one's personal life.

Classification: Classified by David Callahan, the types of incentives can be further broken down into three broad classes according to the different ways in which they motivate agents to take a particular course of actions:

Monetary incentives: Monetary incentives are any form of financial good given to someone to incentivize their actions and align their incentives with those of the principal who provides the monetary incentive. This is a type of extrinsic incentive and is commonly seen in the workplace. The effect of monetary incentive can be broken down into two categories: the "standard direct price effect," and "indirect psychological effect".  These two types of monetary effect often work in opposite direction and crowd out incentivised behaviour. However, several studies have suggested that it is possible to manage the crowding-out effects by utilising a principal-agent model that incorporates nonstandard assumptions. For instance, a monetary incentive may come in the forms of profit sharing, bonuses, stock options or even paid vacation time. As such, a well-chosen monetary incentive programs can produce positive motivation and influence the productivity and output of individuals and firms.
A common monetary incentive system used by firms is performance-based pay where incentives are paid based on employees' productivity or output over a particular period of time. Some methods are commission-based where the employee, for example a salesperson, receives a payment directly correlated to their output level. Firms also pay additional wages or rewards for employees who work overtime and for their additional work above firm expectations. Expectancy theory implies that, provided employees place sufficient value on the monetary incentive to justify their extra effort and perceive that greater effort will result in better performance, such incentives can motivate employees to maintain high levels of effort and discourage shirking. This in turn increases the individual productivity of workers and the overall productivity of the firm.
Other monetary incentives are less direct, such as awarding periodic, discretionary bonuses to top performers, offering the possibility of a promotion to a higher-paying position or profit sharing for team projects. Alternatively, firms can also incentivize their employees to perform by threatening to demote or terminate them for poor performance. When employees feel that their careers are in jeopardy, they are more likely to increase their efforts.
Monetary incentives do affect the effort and average performance of employees but are likely dependent on the scope of the job and the task variables. For routine jobs such as clerical and administration jobs that are mundane, the presence of monetary incentives will encourage employees to demonstrate consistent effort of diligence when the intrinsic incentive has been exhausted. On the other hand, if the task assigned is too challenging, monetary incentives make little to no difference in increasing an employee's contribution to work.
The effect of monetary incentives can depend on the framing of the rewards. For example, in cadaveric organ donation, funeral aids are perceived to be more ethical (particularly in showing gratitude and honoring the deceased donor) and potentially increase donation willingness than direct cash payments of the same monetary value.

Non-monetary incentives: Non-monetary incentives can act as an impactful reward system to employees with superior performance that is independent to predetermined targets. They refer to the use of rewards or benefits that are not directly related to money or financial compensation to motivate individuals to perform specific actions or achieve desired outcomes 
The use of non-monetary incentives is based on the recognition that individuals are motivated by a range of factors beyond financial rewards and acts as a reinforcement to encourage work engagement and productivity. Some examples of these incentives include extra paid holidays, recognition, praise, opportunity for personal or professional growth, gifts, family benefits or even work-based perks such as more interesting projects or work.
Individual may be motivated by a sense of purpose, a desire for personal fulfillment or growth, a need for social recognition or status, or other non-financial factors. By providing these types of incentives tend to boost employees' job satisfaction as they feel more appreciated for their efforts and lower turnover rates. Compared to monetary incentives, studies have shown that employees find non-monetary incentives more memorable as they are separated from normal pay and hence are more distinguishable. In addition, non-monetary incentives are known to promote long-term commitment and loyalty among employees Effective use of non-monetary incentives can positively influence employees’ perception of the company's image as well as increase the morale of firms. Compared to monetary incentives, non-monetary incentives hold a stronger and longer-lasting influence on employees’ motivation as it results in a higher utility level. Employees with higher job satisfaction and morale were found to have better overall performance, contribution and hence higher productivity. Another advantage of non-monetary incentives that it allows a positive work culture that emphasizes cooperation, teamwork, and social responsibility.
However, non-monetary incentives also have some limitations and undesirable consequence.  For instance, it can be less effective in motivating individuals who are primarily motivated by monetary incentives such as financial rewards. This may be especially true for individuals who are in low-paying jobs or who face significant financial stress or insecurity. Another concern is that non-monetary incentives may be more difficult to quantify and evaluate than monetary incentives. This may create several challenges for a firm or organisation to design and implement effective incentive programs that are aligned with their goals and objectives.
Overall, both monetary and non-monetary incentives are important tools to influence individual and organizational behavior. While monetary incentives may be more effective for some individuals or in some contexts, non-monetary incentives can be equally effective in promoting long-term commitment, fostering a positive work culture, and promoting social responsibility. Ultimately, the most effective incentive programs will likely incorporate a combination of monetary and non-monetary incentives to create a positive and comprehensive approach to motivation and performance.

Incentives in the economic context: The economic analysis of incentives focuses on the systems that determine the incentives needed for an agent to achieve a desired outcome dictated by the principal. Incentives can help companies link employees' rewards to their productivity. When a firm wants their employees to produce a certain amount of output, it must be prepared to offer a compensation scheme such as a monetary bonus to persuade employees to reach the target output. Compensation must achieve two goals. The first is to reduce employee turnover and retain the highest performing and most productive employees. Compensating employees can help attract workers to work harder and retain their ability. The second is to improve productivity. Compensation can not only stimulate the ability of workers to produce output, but also improve the enthusiasm of employees to work, thus promoting business development. A rise in pay variance across the firm reflects an increased demand for highly productive workers, and therefore compensation has begun shifting towards pay-for-performance. This helps employees recognize the direct relationship between their work output and their reward.
While incentive has become one of a powerful tool to motivate and influence certain behaviour or action, they can also have unintended consequences.