Strategies for Reliability Incentive Contracting
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An incentive is a payment or set of payments offered by one party to a contract to the other party in exchange for receiving better performance than has been contracted for. For example, consider a customer who has negotiated a contract to obtain a product of some specified reliability to be delivered at a stated time. An incentive payment might be offered to the producer if a more reliable product is provided and/or if delivery is made early. The improved reliability would have to be demonstrated by subjecting the delivered product to a more rigorous inspection than might be called for in the original contract. The decision problem for the customer is the determination of what constitutes the optimum incentive. The decision problem for the producer is whether or not to improve the performance and if so, to what level?
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