Incentive and quality assurance: an agency theoretical perspective

Abstract

This work considers the integration of quality and production responsibilities, and uses both quality and quantity as contracting attributes. The worker is better off with this arrangement not only through the increased compensation, but also through the job enlargement. In general the optimal contracts are strictly increasing in quantity and quality produced. Detailed comparative statics are derived for linearly additive production and quality-enhancing processes and power utility functions. It is shown that reductions in uncertainty and unit production cost, and increases in quality mark-up price and job-enlargement factors are encouraged by the principal.