Incentive Compatibility

Incentive compatibility means that the interests of two or more individuals are aligned; in contrast, when interests are not aligned, the incentives governing behavior are said to be incompatible. From an organizational perspective, incentive compatibility means that the incentives that motivate individual members in their actions are consistent with the organization's goals.

Incentive compatibility is important in situations in which there is asymmetric information, that is, when at least one participant in an interaction does not know perfectly what another participant knows or does. The problem is that the participant with the more complete information might use that information in a way that benefits him or her at the expense of others. Incentive compatibility means that the interaction is structured in such a way that the ...