Contract design by service providers with private Effort

Hao Zhang, Guangwen Kong, Sampath Rajagopalan

Research output: Contribution to journalArticle

7 Scopus citations

Abstract

We investigate the performance of two commonly used pricing schemes—hourly-rate contract and two-part tari —in service environments where the buyer’s valuation is invisible to the service provider and the provider’s e ort may not be visible to the buyer. In the private e ort environment, we further distinguish between situations where the contract may be based on the outcome or on the e ort reported by the provider. We show that under the two-part tari, when e ort is private, the provider can achieve the same profit as under public e ort by contracting on reported e ort and will be worse o by contracting on outcome. Under the hourly-rate contract, compared with the public e ort case, the provider may be better or worse o in keeping e ort private and contracting on the reported e ort, and the trade-o is a ected by the degree of outcome uncertainty in a nontrivial way. We find that a provider’s profits under an hourly-rate contract are as good as under a two-part tari over a sizable parameter regime when contracting on reported e ort.

Original languageEnglish (US)
Pages (from-to)2672-2689
Number of pages18
JournalManagement Science
Volume64
Issue number6
DOIs
StatePublished - Jun 2018

Keywords

  • Hidden e ort
  • Information asymmetry
  • Pricing
  • Service contracts
  • Service operations

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