ABSTRACT
Incentives are present in every situation. For example, the market provides a set of incentives to a firm. If the firm is profit maximising, these incentives result in the firm aiming to minimise its production costs. This argument is by now very familiar. In Chapter 16 we suggested that some firms, including hospitals, might pursue objectives other than profit maximisation. In some of the models examined there, the owners of the firm were still assumed to wish to maximise profits. However, the managers, as the imperfect agents of the owners, might pursue other objectives. This suggests that in any departure from an owner-operated business without employees the assumption that the market provides all the relevant incentives is flouted. In most contexts, therefore, incentives can be understood only within a principal-agent framework.
