Management Information Systems Commons^™

The Role Of Expectation–Reality Discrepancy In Service Contracts, Xuying Zhao, Hong Guo, Gangshu (George) Cai

Information Systems and Analytics

Service contracts are common practice in some industries while being eliminated in others. To investigate this phenomenon, we identify expectation–reality discrepancy (ERD) as a key determinant. A provider's ERD is defined as consumers’ ex-ante expected valuation minus their ex-post realized valuation of the provider's service. Our analysis reveals that providers’ contract strategies critically depend on their ERDs rather than the true service valuations. A provider with a higher ERD is more likely to enforce contracts, regardless of whether the true service valuation is higher than that of the competitor. Providers should enforce contracts only when they have positive ERDs. Furthermore, …