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

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Author Info
Arrunada, Benito
Garicano, Luis
Vazquez, Luis

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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.

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Publisher Info
Article provided by Oxford University Press in its journal Journal of Law, Economics and Organization.

Volume (Year): 17 (2001)
Issue (Month): 1 (April)
Pages: 257-84
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Handle: RePEc:oup:jleorg:v:17:y:2001:i:1:p:257-84

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Benito Arruñada, 2004. "Quality safeguards and regulation of online pharmacies," Health Economics, John Wiley & Sons, Ltd., vol. 13(4), pages 329-344. [Downloadable!]
  2. Benito Arruñada & Luis Vázquez & Giorgio Zanarone, 2009. "Institutional constraints on organizations: the case of Spanish car dealerships," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(1), pages 15-26. [Downloadable!]
    Other versions:
  3. Benito Arruñada, 2000. "Gestión de la competencia en el sector público," Economics Working Papers 490, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  4. Benito Arruñada, 2000. "The Role of Institutions in the Contractual Process," Economics Working Papers 521, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 2003. [Downloadable!]
  5. Marco Furlotti, 2007. "There is more to contracts than incompleteness: a review and assessment of empirical research on inter-firm contract design," Journal of Management and Governance, Springer, vol. 11(1), pages 61-99, March. [Downloadable!] (restricted)
  6. Benito Arruñada, 2007. "Market and Institutional Determinants in the Regulation of Conveyancers," Economics Working Papers 1034, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  7. Patrick Legros & Andrew F. Newman, 2007. "Competing for Ownership," CEDI Discussion Paper Series 07-02, Centre for Economic Development and Institutions(CEDI), Brunel University. [Downloadable!]
    Other versions:
  8. Jonathan Treussard, 2005. "Life-Cycle Consumption Plans and Portfolio Policies in a Heath-Jarrow-Morton Economy," Boston University - Department of Economics - Working Papers Series WP2005-033, Boston University - Department of Economics. [Downloadable!]
  9. Olivier Cochet & Thomas Ehrmann, 2007. "Preliminary evidence on the appointment of institutional solutions to franchisor moral hazard-the case of franchisee councils," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 41-55. [Downloadable!]
  10. Kessler, Anke & Lülfesmann, Christoph & Schmitz, Patrick W., 2002. "Optimal Contracting in Agency with Verifiable Ex Post Information," CEPR Discussion Papers 3428, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  11. Benito Arruñada, 2000. "The Quasi-Judicial Role of Large Retailers: An Efficiency Hypothesis of Their Relation with Suppliers," Economics Working Papers 445, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  12. Magali Chaudey & Muriel Fadairo, 2009. "Double-Sided Externalities and Vertical Contracting : Evidence from European Franchising Data," Working Papers hal-00376243_v1, HAL. [Downloadable!]
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