In many cases, it is impossible to accurately measure to output, y (recall Alchian and Demsetz on or joint production). In these may seek to employ a proxy, p, for output. In general a proxy for y is chosen that is more easily observed. Suppose the principle chooses p = number of units as a proxy for y = output value. What sort of distortion(s) might occur?

The agents might increase units at lower quality leading to lost sales, returns, and lower received

The agents' production might diverge greatly from sales and create inventory problems

Both of the above