Incentives for Quality through Endogenous Routing
AbstractWe study how rework routing together with wage and piece rate compensation can strengthen incentives for quality. Traditionally, rework is assigned back to the agent who generates the defect (in a self routing scheme) or to another agent dedicated to rework (in a dedicated routing scheme). In contrast, a novel cross routing scheme allocates rework to a parallel agent performing both new jobs and rework. The agent who passes quality inspection or completes rework receives the piece rate paid per job. We compare the incentives of these rework allocation schemes in a principal-agent model with embedded quality control and routing in a multi-class queueing network. We show that conventional self routing of rework can never induce first-best effort. Dedicated routing and cross routing, however, strengthen incentives for quality by imposing an implicit punishment for quality failure. In addition, cross routing leads to workload allocation externalities and a prisoner’s dilemma, thereby creating highest incentives for quality. Firm profitability depends on capacity levels, revenues, and quality costs. With ample capacity, dedicated routing and cross routing both achieve first-best profit rate, while self routing does not. With limited capacity, cross routing generates the highest profit rate when appraisal, internal failure, or external failure costs are high, while self routing performs best when gross margins are high. When the number of agents increases, the incentive power of cross routing reduces monotonically and approaches that of dedicated routing.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1436.
Date of creation: Jul 2006
Date of revision:
Contact details of provider:
Postal: Center for Mathematical Studies in Economics and Management Science, Northwestern University, 580 Jacobs Center, 2001 Sheridan Road, Evanston, IL 60208-2014
Web page: http://www.kellogg.northwestern.edu/research/math/
More information through EDIRC
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-04-09 (All new papers)
- NEP-BEC-2007-04-09 (Business Economics)
- NEP-LAB-2007-04-09 (Labour Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Naor, P, 1969. "The Regulation of Queue Size by Levying Tolls," Econometrica, Econometric Society, vol. 37(1), pages 15-24, January.
- Martin A. Lariviere & Evan L. Porteus, 2001. "Selling to the Newsvendor: An Analysis of Price-Only Contracts," Manufacturing & Service Operations Management, INFORMS, vol. 3(4), pages 293-305, May.
- Noah Gans & Ger Koole & Avishai Mandelbaum, 2003. "Telephone Call Centers: Tutorial, Review, and Research Prospects," Manufacturing & Service Operations Management, INFORMS, vol. 5(2), pages 79-141, September.
- Diane J. Reyniers & Charles S. Tapiero, 1995. "The Delivery and Control of Quality in Supplier-Producer Contracts," Management Science, INFORMS, vol. 41(10), pages 1581-1589, October.
- Erica L. Plambeck & Stefanos A. Zenios, 2000. "Performance-Based Incentives in a Dynamic Principal-Agent Model," Manufacturing & Service Operations Management, INFORMS, vol. 2(3), pages 240-263, April.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fran Walker).
If references are entirely missing, you can add them using this form.