Incentives for Quality through Endogenous Routing

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 multi-class queueing network. We show that conventional self routing of rework can never 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 highest incentives for quality. Firm profitability depends on capacity levels, revenues, and quality costs. With ample capacity, dedicated routing and cross routing both achieve first-best profit rate, while self routing does not. With limited capacity, cross routing generates the highest profit rate when appraisal, internal failure, or external failure costs are high, while self routing performs best when gross margins are high. When the number of agents increases, the incentive power of cross routing reduces monotonically and approaches that of dedicated routing.queueing networks; routing; Nash equilibrium; quality control; piece rate; epsilon equilibrium.

Impact of Inventory Risk on Sales Effort Provisioning: Theoretical Predictions and Empirical Evidence

In this paper, we examine the impact of inventory risk allocation on the sales effort decisions when a firm sells products directly to consumers through independent agents. Building upon a game-theoretic model of a seasonal product whose demand is uncertain, we compare the optimal sales effort, sales volume and firm profitability under a push versus pull system. Subsequently, we test the key theoretical predictions using a novel dataset to understand and validate the key drivers of the firm\u27s and agent\u27s decision making process. In contrast to the extant literature, we show that a push system can lead to higher firm performance when demand is driven primarily through sales effort even when it transfers significant inventory risk to the agents. This is because when the agents\u27 sales ability is high, they are able to better manage the inventory risk imposed by a push system through their sales effort choices. We also find that the optimal sales compensation that offers agents additional incentives for meeting certain sales thresholds exhibit counter-intuitive and non-monotonic behavior. Importantly, offering incentives that are tailored to match the characteristics of push and pull systems can enable firms to both motivate effort and improve profitability. The empirical analysis, which uses multi-year cookie sales data from a large local council of the Girl Scout organization, first estimates the sales ability of girl scouts and then validates the key theoretical predictions regarding the relationship between an agent\u27s sales ability and a firm\u27s ordering policy requirements. We find that the push system widens the individual sales performance gap by approximately 58 boxes between two girl scouts who are separated by one standard deviation (183 boxes) of sales ability, which is a 62% increase from the pull system. The detailed individual-level data that also captures the different sales activities of individual girl scouts enables us to unravel the drivers behind our empirical findings. These findings have important implications for direct selling firms that offer unique products through non-traditional distribution channels

Impact of Inventory Risk on Sales Effort Provisioning: Theoretical Predictions and Empirical Evidence

In this paper, we examine the impact of inventory risk allocation on the sales effort decisions when a firm sells products directly to consumers through independent agents. Building upon a game-theoretic model of a seasonal product whose demand is uncertain, we compare the optimal sales effort, sales volume and firm profitability under a push versus pull system. Subsequently, we test the key theoretical predictions using a novel dataset to understand and validate the key drivers of the firm\u27s and agent\u27s decision making process. In contrast to the extant literature, we show that a push system can lead to higher firm performance when demand is driven primarily through sales effort even when it transfers significant inventory risk to the agents. This is because when the agents\u27 sales ability is high, they are able to better manage the inventory risk imposed by a push system through their sales effort choices. We also find that the optimal sales compensation that offers agents additional incentives for meeting certain sales thresholds exhibit counter-intuitive and non-monotonic behavior. Importantly, offering incentives that are tailored to match the characteristics of push and pull systems can enable firms to both motivate effort and improve profitability. The empirical analysis, which uses multi-year cookie sales data from a large local council of the Girl Scout organization, first estimates the sales ability of girl scouts and then validates the key theoretical predictions regarding the relationship between an agent\u27s sales ability and a firm\u27s ordering policy requirements. We find that the push system widens the individual sales performance gap by approximately 58 boxes between two girl scouts who are separated by one standard deviation (183 boxes) of sales ability, which is a 62% increase from the pull system. The detailed individual-level data that also captures the different sales activities of individual girl scouts enables us to unravel the drivers behind our empirical findings. These findings have important implications for direct selling firms that offer unique products through non-traditional distribution channels