Summary

  • Shuo Zeng
  • Moshe Dror
Chapter
Part of the SpringerBriefs in Operations Management book series (BRIEFSOPERMAN)

Abstract

In this paper we examine a basic principal-agent arrangement for contracting an exclusive equipment repair service supplier. The system setting consists of one principal, one agent, and one revenue generating unit that breaks down from time to time and needs to be repaired when a failure occurs. Our assumptions are that the risk-neutral principal maximizes her expected profit rate given market driven revenue rate r collected during the unit’s uptime, the unit’s failure rate λ, and the agent’s risk attitude η. We consider different agent types – risk neutral, weakly risk-averse, strongly risk-averse, weakly risk-seeking, moderate risk-seeking, and strongly risk-seeking. As is common in a principal-agent context the principal cannot contract directly for the agent’s service capacity μ. The nature of the principal-agent contract is that the principal supports the agent at a compensation rate w > 0 but imposes on the agent a penalty rate p > 0 during the time the unit is down. We note that the nature of the contract does not change if the w is paid to the agent only during the unit’s uptime. In fact, the two contract versions are equivalent (see Observation 3.1).

Keywords

Risk Premium Service Capacity Optimal Contract Penalty Rate Exogenous Condition 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
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Copyright information

© Springer International Publishing Switzerland 2016

Authors and Affiliations

  • Shuo Zeng
    • 1
  • Moshe Dror
    • 1
  1. 1.Eller College of ManagementUniversity of ArizonaTucsonUSA

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