Team production: Total Quality Management (TQM) and the role of peer pressure
Abstract
The recent emergence of Total Quality Management (TQM) in the U.S. has spawned a great deal of interest in management circles as well as in the mass media. However, despite the growing number of firms that have adopted this particular management technique, little has been done to develop a formal economic model capable of explaining this phenomenon. The first essay extends the standard principal-agent model to a multi-task, multi-agent setting in order to explore reasons why some firms but not others have adopted the TQM team approach to quality improvement. In this context, the model developed predicts that the TQM approach is more likely to be adopted by firms that place a higher value on quality, are larger, produce products with a greater base defect rate or proportion of defects introduced "in house" and have less turnover. Once the TQM approach is implemented, the predicted results include a reduction in traditional quality-related effort, a reduction in the overall defect rate, and an increase in non-defective sales. Support is found for these and other related predictions using a unique data set that combines data on firms from three different sources. The second essay investigates the role that peer pressure plays in influencing the optimal incentive scheme offered workers engaged in team production. A key feature of the analysis is the presumption that peer pressure involves the choice by each agent of the extent to which coworkers are monitored or policed. In a game-theoretic setting, it is shown that introducing peer pressure alters the optimal compensation package given that the principal must compensate workers for their policing efforts as well as for the costs that peer pressure imposes on workers. Conditions are established under which the principal will reduce the marginal compensation rule in order to reduce policing efforts. As such, peer pressure provides another rationale for a reduced link between compensation and output.
Degree
Ph.D.
Advisors
Barron, Purdue University.
Subject Area
Labor economics|Management
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