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Incentives for Quality Through Endogenous Routing

Kenan-Flagler Business School, University of North Carolina, Chapel Hill, North Carolina 27599
Kellogg School of Management, Northwestern University, Evanston, Illinois 60208
Kellogg School of Management, Northwestern University, Evanston, Illinois 60208
lauren_lu{at}unc.edu
vanmieghem{at}northwestern.edu
r-savaskan{at}kellogg.northwestern.edu

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.

Key Words: queueing networks; routing; Nash equilibrium; quality control; piece rate; epsilon equilibrium
History: Received: July 14, 2006; accepted: December 16, 2007.