Why do we believe in incentives?

The way in which companies try to solve the problem of unruly executives, or staff, and corporate governance seems to be dominated by the assumption of incentives.  We calculate our best interest, and as such, act towards the opportunities we find most compelling.  We can be incentivised to act in particular ways, therefore.  Stock options align the interests of managers with shareholders, for instance.

In the research on incentives however, its pretty evident that the above-mentioned equation rarely works out.  Many times, of course, we simply fail to imagine, in advance, those objectives towards which we would like people to align.  Other times, we fail to capture the incentives people truly value.  When we hit these nails however, it seems that incentives still don’t make the world fall nicely into alignment.

Given the fact that incentives exhibit very mixed results in terms of directing idealized outcomes, why do we still speak of people in these terms?  MacGregor (1951, I believe) developed his theory X and Y. But why are we theory X or theory Y?  Or more specifically, when are we most likely to find a home in either of these camps?

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