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- Title
Impact of Performance-Based Contracting on Product Reliability: An Empirical Analysis.
- Authors
Guajardo, Jose A.; Cohen, Morris A.; Sang-Hyun Kim; Netessine, Serguei
- Abstract
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.
- Subjects
PERFORMANCE contracts; RELIABILITY in engineering; CONTRACTS for work &; labor; AIRCRAFT engine industry; ENGINE maintenance &; repair; SUPPLY chain management; OPERATIONS management; SUPPORT services (Management); CONTRACTING out
- Publication
Management Science, 2012, Vol 58, Issue 5, p961
- ISSN
0025-1909
- Publication type
Article
- DOI
10.1287/mnsc.1110.1465