ABSTRACT
Incentives are present in every situation. For example, the market provides a set of incentives to a rm. If the rm is pro t-maximising, these incentives result in the rm aiming to minimise its production costs. This argument is by now very familiar. In Chapter 15, we suggested that some rms, including hospitals, might pursue objectives other than pro t maximisation. In some of the models examined there, the owners of the rm were still assumed to wish to maximise pro ts. 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 outed. In most contexts, therefore, incentives can be understood only within a principal-agent framework.
