Incentives for Quality through Endogenous Routing

Manufacturing & Service Operations Management 11(2) 254-273, 2009

UNC Kenan-Flagler Research Paper

20 Pages Posted: 1 Feb 2013 Last revised: 5 Feb 2013

Abstract

We 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 cannot 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 the greatest incentives for quality. Firm profitability depends on demand levels, revenues, and quality costs. When the number of agents increases, the incentive effect of cross routing reduces monotonically and approaches that of dedicated routing.

Suggested Citation

Lu, Lauren Xiaoyuan and Van Mieghem, Jan Albert and Savaskan, R. Canan, Incentives for Quality through Endogenous Routing. Manufacturing & Service Operations Management 11(2) 254-273, 2009, UNC Kenan-Flagler Research Paper, Available at SSRN: https://ssrn.com/abstract=2209330

Lauren Xiaoyuan Lu (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

Jan Albert Van Mieghem

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

R. Canan Savaskan

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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