Payment Plan for the Delegation of One or Two Inspection Agencies

Abstract

This paper provides the framework for a payment plan based on inspection results in the delegation of inspection agencies. The paper deals with two cases—that in which one inspector checks the quality of the inspection object (e.g., a design drawing of building) and that in which two inspectors check it simultaneously. The paper points out the applicability of a penalty only in the framework with two inspectors. In addition, it is shown that an appropriate bonus and penalty system based on inspection results can resolve moral hazard and adverse selection problems, and that the framework with two inspectors is superior to that with one if both the upper bound of penalty and social loss, which occurs when the object that does not meet the requisite standards passes an inspection, are relatively large.