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IMA Journal of Management Mathematics Advance Access originally published online on July 4, 2005
IMA Journal of Management Mathematics 2006 17(2):99-113; doi:10.1093/imaman/dpi028
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© The authors 2005. Published by Oxford University Press on behalf of the Institute of Mathematics and its Applications. All rights reserved.

Risk aversion in maintenance: overmaintenance and the principal-agent problem

Rose Baker**

Centre for Operational Research and Applied Statistics, School of Accounting, Economics and Management Science, University of Salford, UK

** Email: r.d.baker{at}salford.ac.uk

The concept of a risk-averse maintenance policy is introduced, and two approaches to modelling it are discussed, the first being via utility functions, and the second via inflation of the costs of unscheduled failures. After introducing a general methodology, several examples of its application are given. Principal-agent theory is then applied to the case of a maintenance engineer (the agent) who overmaintains equipment due to excessive risk aversion. Incentives based on the total cost of maintenance and failures can reduce overmaintenance, and it may be optimal for management to pay such an incentive. The problem is illustrated with an example of block maintenance. Suggestions for further work in this field are made.

Keywords: utility function; overmaintenance; block maintenance; age-based replacement; principal-agent problem; incentives


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