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 principal-agent problem in this case?

Question

Quizplus · Accepted Answer

The factory owner is using an incentive-based approach to encourage the workers to produce as many widgets as possible while also ensuring that the quality of the widgets is not compromised. By checking the widgets at various stages of production and docking the pay of the entire section responsible for any defects found, the factory owner is incentivizing the workers to produce high-quality widgets. This approach helps to address the principal-agent problem by aligning the interests of the workers (the agents) with those of the factory owner (the principal).

A Factory Owner Wants His Workers to Produce as Many