The Value of Delegated Quality Control

27 Pages Posted: 11 Jul 2017

See all articles by Alexander E. Saak

Alexander E. Saak

Kansas State University - Department of Agricultural Economics; CGIAR - Markets, Trade, and Institutions Division

Date Written: June 2017

Abstract

This paper studies the case in which a firm delegates quality control to an independent monitor. In a repeated game, consumers’ trust provides incentives to acquire information about whether the good is defective, and withhold defective goods from sale. If third‐party reports are observable to consumers, delegation lessens the first and dispenses with the second moral hazard concern but also creates agency costs. Internal quality control is optimal only if trades are sufficiently frequent and consumer information is sufficiently precise. This result holds in the presence of the possibility of collusion, fully non‐verifiable presale information, and economies of scale in external quality control.

Suggested Citation

Saak, Alexander E. and Saak, Alexander E., The Value of Delegated Quality Control (June 2017). The Journal of Industrial Economics, Vol. 65, Issue 2, pp. 309-335, 2017, Available at SSRN: https://ssrn.com/abstract=3000051 or http://dx.doi.org/10.1111/joie.12138

Alexander E. Saak (Contact Author)

CGIAR - Markets, Trade, and Institutions Division ( email )

United States

Kansas State University - Department of Agricultural Economics

Manhatten, KS 66506-4001
United States
(785) 532-3334 (Phone)

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