Incentives for Monitoring Quality
Volume: Volume 22, No. 3
Issue: Autumn 1991
Pages: pp. 370-384
Authors: Tracy R. Lewis and David E.M. Sappington
Title: Incentives for Monitoring Quality
Abstract: We analyze a procurement problem in which the quality of the delivered product can be observed perfectly by the buyer and supplier, but may not be verifiable, i.e., may not be observable to any third party. We present a set of plausible conditions under which the equilibrium welfare of both the buyer and supplier is higher when quality is verifiable than when it is unverifiable. The welfare gain for the privately informed supplier arises even when the buyer has all the bargaining power. Thus, the interests of the buyer and supplier coincide with regard to whether delivered quality should be made verifiable.
JEL Classification
Information and Product Quality (L150)
Marketing and Advertising (5310)
Theory of Uncertainty and Information (0261)