In many industries where production or sales is delegated to a number of subunits, the central management faces the classical problem how to induce continuous efficiency improvements, organizational learning and transfer of knowledge with a minimum of control exercised. This paper draws on recent results regarding regulatory frameworks to construct simple, yet powerful incentive schemes for decentralized production under asymmetric information. The theoretical foundation is based on principal-agent theory (cf. Laffont and Tirole, Econometrica 56 (1986) 614-641) and extensions to production theory by Bogetoft (Management Science 40 (1994) 959-968). The proposed incentive system is operational and makes use of available information to provide positive incentives for participation in the dynamic development of the entire organization. © 2002 Elsevier Science B.V. All rights reserved.
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