Economic Incentives and the Knowledge Economy

Economic Incentives and the Knowledge Economy

Copyright: © 2011 |Pages: 9
DOI: 10.4018/978-1-59904-931-1.ch023
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It is not a new idea that knowledge plays an important role in the economy, nor is it a new fact. However, the degree to which knowledge is now generated and exploited, as a means of generating wealth, is immense (United Kingdom Department of Trade and Industry, 1998). Lank (1997) argues that human expertise and knowledge are the source of value creation in today’s knowledge intense world economy. Our ability to acquire and distribute information has increased its value to all participants in the economic system (Houghton and Sheehan, 2000). Knowledge is a unique asset to a firm; in the right hands, it can create immense value, however, people can leave the business at any moment in time, taking all their knowledge with them. While many firms now use information technology systems to collect and store knowledge, these systems are worthless unless firms encourage and incentivise knowledge sharing.

Key Terms in this Chapter

Competitive advantage: This is a position a firm occupies against its competitors, allowing it to earn revenues higher than costs, including cost of capital.

Adverse Selection: Concerns the problem of hidden information that can adversely affect the efficiency of a market, such as in insurance where unhealthy people are more likely to seek health insurance.

Incentive: Financial compensation, public recognition or other benefits used to reward higher levels of performance and/or new ideas or contributions.

Principal: A person who authorizes an agent to act to create a relationship (usually of a legal nature) with a third party.

Added Value: Added value refers to the increase in worth of a product or service as a result of a particular activity.

Agent: A person that acts on behalf of a principal, e.g. an employee in a firm.

Asymmetric Information: Information asymmetry occurs when one party to a transaction has more or better information than the other party.

Complete Information: This is a term used to describe a situation in which knowledge about other market participants or players is available to all participants.

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