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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.
reliability, maintenance repairs, empirical operations management, supply chain contracting, aerospace industry
Guajardo, J., Cohen, M. A., & Netessine, S. (2012). Impact of Performance - B ased Contracting on Product Reliability : An Empirical Analysis. Management Science, 58 (5), 961-979. http://dx.doi.org/10.1287/mnsc.1110.1465
Date Posted: 27 November 2017
This document has been peer reviewed.