Incentives for Quality through Endogenous Routing

Abstract

We study how rework routing together with piece rate compensation can improve incentives for quality. When a worker generates a defect, rework is conventionally assigned to the originating worker (in a self routing scheme) or to another worker dedicated to rework (in a dedicated routing scheme). In contrast, a novel cross routing scheme allocates a worker’s defects to a parallel worker performing both new jobs and rework. The worker 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 can never induce first-best effort. Dedicated routing and cross routing, however, improve 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 between the two parallel workers, thereby creating the highest incentives for quality. Firm profitability depends on revenues, quality costs, and compensation costs. In general, cross routing generates the highest profit rate when appraisal, internal failure, or external failure costs are high, while self routing performs best when gross margins or disutilities of effort are high. Key words: queueing networks; routing; Nash equilibrium; quality control; piece rate. 1