If you are reading this, thank you and have a great day.
Suppose you need to sell a house and I offer my services for a percentage of sale price, let’s say 3%. You are very busy and that may sound like a good idea, you get 0.97 of the money and I do all the work. But if you are an inquisitive person like me, you’d notice that I only get my money if a sale is made, otherwise my efforts will go unrewarded and my balance will turn out to be negative. Moreover for every additional £97 you get I will only get £3, which is not a lot.
This way, my efforts would get you a sale, but unlikely the best price for your house. This is one example of Misaligned Incentives.
When incentives are misaligned, it’s optimal for one side to get more value at the expense of the other which makes partnership and honest collaboration unlikely.
One option in this case is not to play, another way is to acknowledge the misalignment and act accordingly. But it’s most important to know when the deck is stacked against you.