Incentive and moral hazard in quality assurance, procurement management, and hierarchical control: An agency theoretical perspectiv

In this dissertation, hierarchical agency models are proposed to discuss the cooperative nature of departmental interdependence and the interest conflict between the principal and the agents in production environments. There are three functional areas discussed in this study: quality assurance, procurement management and production supervision. These models are established according to the expertise required in the hierarchy. It is the principal's objective to provide an appropriate incentive to reduce the moral hazard problem.;The first model considers the recent trend of the integration of quality and production responsibilities. Therefore, both quality and quantity are contracting attributes. In general, the optimally designed contracts are strictly increasing in quantity and quality produced. The worker is better off with this arrangement, not only through the increased compensation, but also through the enlarged responsibilities. The exact incentive scheme depends on the agents' risk attitudes and the quality-enhancing technology.;The second model deals with the interaction between procurement and production management. The production costs crucially depend on the materials, components and subassembly purchased by the procurement department, and on the effort expended by the production department. Linear profit-sharing and target-setting incentive schemes are adopted in this environment. The materials' quality is used to adjust the cost target for the production department. It is shown that in both first-best and second-best cases, profit-sharing compensation is always preferred to fixed salary. The agents' compensations are tied to their positions when the principal lacks a costless monitoring mechanism. Agency cost is then considered as the expected value of getting a perfect monitoring mechanism.;The third model, unlike the first two models with existing hierarchy, considers the necessity of production supervision and the payoff to establishing an expanded hierarchical structure. The principal's limited span of control and the agents' moral hazard problem explain the desirability of separating the principal from direct production supervision. It is shown that it is indeed to the principal's benefit to expand the hierarchy levels and organization size in many circumstances.