Journal article

Contract design for equipment after-sales service with business interruption insurance

X Qin, L Shao, ZZ Jiang

European Journal of Operational Research | Elsevier | Published : 2020

Abstract

After-sales service is strategically important for mission-critical equipment due to the high operational risks involved (e.g., machine breakdowns). To address this challenge, the operators of such equipment often purchase business interruption (BI) insurance to mitigate operational risks. In this paper, we develop a principal-agent model to study an after-sales service contracting problem with an insurance option. Two prevailing contract forms are considered: a resource-based contract (RBC) and a performance-based contract (PBC). We first show that, in the presence of insurance, a PBC outperforms an RBC in terms of system performance due to the skewed incentives inherent in an RBC. More imp..

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University of Melbourne Researchers

Grants

Awarded by National Natural Science Foundation of China


Awarded by Fundamental Research Funds for the Central Universities


Awarded by Fund for Innovative Research Groups of the National Natural Science Foundation of China


Awarded by Project of Promoting Talents in Liaoning Province


Awarded by 111 Project


Funding Acknowledgements

The author is grateful to the three anonymous referees and the editor for their constructive comments. This research was partially supported by the National Natural Science Foundation of China (Grant nos. 71472034, 71971052, 71671033, 71871038). the Fundamental Research Funds for the Central Universities (N160601001), the Fund for Innovative Research Groups of the National Natural Science Foundation of China (71621061), the Project of Promoting Talents in Liaoning Province (XLYC1807252) and the 111 Project (B16009).