ISSN : 1796-203X
Volume : 4    Issue : 10    Date : October 2009

Payment Plan for the Delegation of One or Two Inspection Agencies
Mamoru Yoshida and Hirokazu Tatano
Page(s): 997-1004
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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.

Index Terms
delegation of inspection, payment plan, institutional design, bonus and penalty