Abstract:It is generally accepted that if headquarters is uncertain about intrinsicc capability (high or low) to control production cost of its workplaces under asymmetric information, then managers in the location with high capability to control cost have the chance and intention to disguise real ability of workplaces. As the manager has to confront a more severe standard cost program in the next period once capability revealed. The ratchet effect arises when the manager supplies low effort and high cost to avoid more demanding schedules of cost control in the future. A workplace rotation can restraint such ratchet effect, but at the same time, it sacrifices experience curve effects. In this paper, two-period game model is introduced, under which the optimal payoff scheme is designed and condition of rotation to motivate manager effectively explored.