A factory owner wants his workers to produce as many widgets as they can, so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the agency problem in this case?

Question

Quizplus · Accepted Answer

The factory owner is supplying incentives (pay based on widget production) in order to align the workers' interests with his own, thus seeking to solve the agency problem of the workers potentially prioritizing quantity over quality. The random checks on the widgets additionally serve as a monitoring mechanism to ensure the workers are producing quality widgets.

A Factory Owner Wants His Workers to Produce as Many