Hedonic prices and multitask incentives

Human tasks are often multidimensional. Holmstrom and Milgrom (1991) concluded that ghigh-poweredh incentives cannot work unless all dimensions of these tasks are observable in the firm. However, as this study shows, if the firm can observe the price vector of its products in the market, distinguish each dimension of the price vector, and connect the information with signals from workers in the firm, then the use of multitask ghigh-poweredh incentives becomes feasible. Product differentiation with committed quality satisfies those conditions, which has been practiced by Japanese, but not by Western, manufacturing for a century.