Risk-Aversion and B2B Contracting Under Asymmetric Information: Evidence from Managed Print Services

Abstract

Managed print service (MPS) is a type of information technology infrastructure service that provides centralized management of companies’ printing device fleets. In this paper, we estimate the provider’s risk preference in MPS using a proprietary data set from Xerox Corporation. We adopt a structural approach in our empirical analysis by modeling the contracting and usage processes of MPS as a two-stage screening game and building econometric models based on the equilibrium contracts and print volumes. Our econometric models have a unique hierarchical structure that allows clustering of printers with the same contracts in the same company, thereby capturing the B2B nature of MPS. We find that Xerox exhibits risk aversion in MPS contracting and provide institutional details of Xerox’s commission holdback policy that may cause the observed risk aversion. In the counterfactual analysis, we demonstrate the significance of the provider’s risk aversion and the implications of the commission holdback policy on equilibrium contracts, the expected earnings of Xerox and customer companies, and their preferences for printer models. The E-companion is available at https://doi.org/10.1287/opre.2017.1673 .