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23 February, 18:58

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?

A. By making the agents into principals themselves.

B. By ensuring that all workers co - operate to maximize the gains of their section.

C. By maximizing the information that the principal obtains about the behavior of the agents.

D. By supplying incentives so the agents act in the way principal desires.

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  1. 23 February, 20:29
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    D. By supplying incentives so the agents act in the way principal desires.

    Explanation:

    To solve this issue, owner should have to reduce the impact to the principal originated by an agent. First step is to identify the agents involved in the particular quality issue, so determine accurately the source of defects. Then, create a new incentive policy where payment dock is high (or bonus less) for workers involved, and lower for the rest of the team (principal) (or bonus high).

    In this way, agents will try to avoid defects as they will consider themself as main affected part.
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