Incentivizing behavior works better than incentivizing performance: An overview

Abstract

This study examines the importance of incentivization within microeconomic theory, focusing on its role in shaping individual and organizational decision-making. While traditional research has predominantly emphasized performance-based incentives tied to measurable outcomes, existing literature remains fragmented regarding the effectiveness and sustainability of behavior-based incentives. This gap limits a holistic understanding of how incentives influence long-term behavioral change. The objective of this study is to critically review and synthesize scholarly work comparing behavior-based and performance-based incentivization, with particular attention to their theoretical foundations, empirical support, and practical limitations. Using a structured qualitative literature review methodology, the study draws on microeconomic theory, alternative economic perspectives, and empirical studies to evaluate the mechanisms and outcomes of different incentive models. The findings suggest that behavior-based incentives offer distinct advantages in promoting sustained engagement and alignment with organizational goals, although they also present conceptual and implementation challenges. The study further reveals that contextual and psychological factors significantly influence incentive effectiveness. These insights contribute to advancing theoretical clarity and informing the design of more effective incentive systems. The implications highlight the value of integrating behavior-based approaches into microeconomic models to support more adaptive and sustainable policy and managerial practices.

Keywords: Behavioral economics; incentives; microeconomics; organizational behavior; performance incentives