Incentives for quality through endogenous routing

Lauren Xiaoyuan Lu, J. A. Van Mieghem, R. Canan Savaskan

Research output: Contribution to journalArticlepeer-review

20 Scopus citations

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 multiclass 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.

Original languageEnglish (US)
Pages (from-to)254-273
Number of pages20
JournalManufacturing and Service Operations Management
Volume11
Issue number2
DOIs
StatePublished - Mar 2009

Keywords

  • Epsilon equilibrium
  • Nash equilibrium
  • Piece rate
  • Quality control
  • Queueing networks
  • Routing

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research

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