Incentive Alignment

Incentive alignment is the condition in which the self-interested actions of individuals or institutions produce outcomes that are collectively desirable. When incentives are misaligned, rational individual behavior produces collectively harmful results — the defining feature of collective action problems.

The concept is central to mechanism design, game theory, and institutional economics. A well-designed institution aligns incentives so that private and social costs coincide. A poorly designed institution creates perverse incentives that reward behavior undermining the institution's stated goals.

The fundamental theorem of institutional analysis is not that people are bad. It is that good people in badly designed institutions produce bad outcomes. Incentive alignment is the art of making virtue rational.