This article develops a theory of how economic incentives alter a state's external payoff environment and affect its internal preferences and choices. Externally, incentives offer an exchange of economic gains from trade and technology transfer for political concessions. Incentives may be compelling in altering state behavior and fostering bilateral cooperation over time, especially when: (1) both the sender and the recipient stand to gain in economic terms through the creation of new trade; (2) the recipient's total utility for the goods or gains from trade remains substantially positive (this situation typically occurs when technology is a part of the package because technology alters a state's overall productive capacity); and (3) the sender has market power in the traded goods. Internally, incentives shape state preferences in a cooperative direction in four important ways, in contrast to sanctions. First, societal actors in the sender state who stand to gain economically from expanded trade lend support over time for an incentive thereby improving the policy's legitimacy and endurance. Public opinion is likely to follow the lead of elites. Second, certain actors in the recipient state who can appropriate the economic benefits tend to ally with the sender state and reinforce its efforts to move the recipient's policy preference in the direction of the sender's intent. Third, incentives are unlikely to create an impetus to elude or undermine its influence through the search for third-party suppliers or to create the economic conditions that invite new entrants. Finally, incentives convey more-precise information to decision-makers in the recipient state and in a manner that is unlikely to be filtered or avoided by them. As for the dependent variable of international cooperation, the theoretical argument commends investigation of diffuse factors that shape state preferences and influence cooperation. While incentives are “under-theorized” in the international relations literature (despite considerable interest in economic coercion), they are not unnoticed by policy-makers. This article examines three pertinent historical case studies, in part to help generate hypotheses on how incentives work but also to offer some policy advice as to when incentives might work and what factors contribute to or detract from their practical effectiveness. The article concludes with suggestions for further research.