Incentive effects favor nonconsolidating queues in a service system: The principal-agent perspective

In this paper, we study a service network in which an agency is responsible for satisfying a constraint on the expected waiting and service time exper ienced by customers. However, the agency does not render the actual service . Instead, it serves to coordinate independently operated facilities. The c oordinating agency must devise a strategy for allocating compensation and c ustomers to the self-interested operators in order to minimize its own cost s. For a network of two facilities, we model the facilities' self-intereste d capacity decisions as the solution to a game. Using this analytical frame work, we compare two types of customer allocation: one from a common queue, and one from separate queues. Our analysis shows that it can be in the bes t interest of the coordinating agency to adopt a separate queue allocation scheme instead of one based on a common queue. Although doing so sacrifices risk-pooling benefits, these can be more than offset by the stronger incen tives that are created for the independent facilities.