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 conflict problem in this case?

Question

Quizplus · Accepted Answer

The factory owner is using incentive-based pay to motivate workers to produce more widgets but also ensuring quality control at various stages to prevent the workers from rushing and producing poorly made widgets. By docking the pay of the entire section responsible for a defect, the factory owner is creating a sense of collective responsibility and incentivizing workers to help each other produce high-quality widgets. This is an example of solving the agency conflict problem by supplying incentives so that agents (workers) act in the way the principal (factory owner) desires.

A Factory Owner Wants His Workers to Produce as Many