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Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution

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  • Arrunada, Benito
  • Garicano, Luis
  • Vazquez, Luis

Abstract

We analyze empirically the allocation of rights and monetary incentives in automobile franchise contracts. All of these contracts substantially restrict the decision rights of dealers and grant manufacturers extensive rights to specify and enforce dealers' duties. The allocation of decision rights and incentive intensity differs across brands, however. This variation is explained by the incidence of moral hazard. In particular, when the cost of dealer moral hazard is higher and the risk of manufacturer opportunism is lower, manufacturers hold more rights to determine the performance required from their dealers and to use mechanisms such as monitoring, termination, and monetary incentives to ensure that such performance is provided. Copyright 2001 by Oxford University Press.

Suggested Citation

  • Arrunada, Benito & Garicano, Luis & Vazquez, Luis, 2001. "Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 17(1), pages 257-284, April.
    • Handle: RePEc:oup:jleorg:v:17:y:2001:i:1:p:257-84
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    More about this item

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
    • K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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