This paper provides an economic rationale for modern manufacturing control practices such as the minimal inventories in Just in Time (JIT)systems, zero-defect policies, and continuous improvement. The popular and academic literature contains descriptive studies on the mechanics of these systems and their perceived benefits. We use a model of production to analyze both informational and incentive rationales for reduced inventories. A JIT-like environment of low inventory levels is optimal in our model because it helps workers to better observe and understand the production process and to think and act creatively to improve operational reliability and yields. Empirical evidence using data obtained from 116 plants worldwide supports our conclusions about the effect of reduced inventories on process reliability, product quality, and cost.just-in-time, inventory, information, incentives, quality, cost, control, performance
Abstract. A theory of intrafirm allocation under information asymmetry based on Myerson's general theory of mechanisms is developed. From the general model, it is shown that every Myerson equilibrium resource allocation mechanism is a "cost plus" type of transfer pricing. Specializing the general model to allow risk-neutral agents, we derive the exact form of the compensation schemes in dominant strategy equilibrium transfer pricing mechanism. The general Myerson agency problem is transformed into a central planner's problem enabling us to bypass the first-order approach to the problem. The closed form solution shows that each of the agents' compensation schemes is composed of a profit-sharing component, a cost refund, taxes, and subsidies, making it a Groveslike scheme. Additional results show that if the principal is asymmetrically informed about one of the agents only, the agent may derive rent from private information under monotonic compensation schemes, and we provide additional conditions under which Hirshleifer's classical marginal cost pricing is in equilibrium.
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