An Empirical Analysis of the Incentive-Action-Performance Chain of the Principal-Agent Model

Abstract:     
This study empirically investigates the incentive-action-performance chain on cross-sectional plant data in the context of a Just-in-time (JIT) plant manufacturing environment. Incentives in this study are of the soft goal-oriented variety rather than direct compensation. The empirical analysis is implemented using Ordinary Least Squares and Heckman two-stage regressions to account for the potential endogeneity of the JIT adoption decision. We find that plant performance outcomes are associated with actions, namely, the breadth and intensities of plant JIT practices adopted by plant management, but are not associated with performance incentives. However, we find that the JIT adoption decision is associated with incentives. We further find that it is the essential inventory incentive aspects of JIT, such as increasing inventory turns and reducing scrap/waste, that motivate JIT adoption rather than other arguably less central incentive aspects of JIT such as product quality. Overall, our results are consistent with the predictions of the implicit career incentives Principal-Agent model but not with predictions of the standard explicit incentives Principal-Agent model.

Keywords: principle-agent, just-in-time manufacturing, career incentives, endogeneity

JEL Classification: D29, D82, M40, M46

Accepted Paper Series