Impact of Performance-Based Contracting on Product Reliability: An Empirical Analysis

Using a proprietary data set provided by a major manufacturer of aircraft engines, we empirically investigate how product reliability is impacted by the use of two different types of after-sales maintenance support contracts: time and material contracts (T&MC) and performance-based contracts (PBC). We offer a number of competing arguments based on the theory of incentives that establish why product reliability may increase or decrease under PBC. We build a two-stage econometric model that explicitly accounts for the endogeneity of contract choices, and find evidence of a positive and significant effect of PBC on product reliability. The estimation of our model indicates that product reliability is higher by 25%–40% under PBC compared to under T&MC, once the endogeneity of contract choice is taken into account. Our results are consistent with two mechanisms for reliability improvement under PBC: more frequent scheduled maintenance and better care performed in each maintenance event. This paper was accepted by Martin Lariviere, operations management.

• 저널Management Science · 58(5) · 961–979
• 토픽Supply Chain and Inventory Management · Management Information Systems
• DOI10.1287/mnsc.1110.1465
• 저자José Guajardo, Morris A. Cohen, Sang-Hyun Kim, Serguei Netessine