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Asset Specificity and Hold-up in Franchising and Grower Contracts: A Theoretical Rationale for Government Regulation?

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  • Lewin-Solomons, S.
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    Abstract

    There has been much controversy over the merits of government regulation to protect growers and franchisees from hold-up at the hands of integrators and franchisors. Typically, economic argument have discouraged regulation, since direct evidence for hold-up is weak and bargaining should yield second-best efficiency. This paper questions direct tests for hold-up, arguing that hold-up occurs only off the equilibrium path but nevertheless influences equilibrium payoffs as a couterfactual. Moreover, when markets do no clear, bargaining may fail to yield net efficiency. In such circumstances, integrators or franchisors will force excessively high levels of asset specificity onto growers or franchisees. And will insist that these small parties be excessively vulnerable to being dismissed, since such an arrangement shifts the distribution of wealth by alleviating the need for high efficiency wages. Market power aggravates this effect. Nevertheless, misguided regulations may also be detrimental if their dir ect economic effects are not well understood.

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    File URL: http://www.econ.cam.ac.uk/research/repec/cam/pdf/wp0013.pdf
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    Bibliographic Info

    Paper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 0013.

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    Date of creation: Nov 2000
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    Handle: RePEc:cam:camdae:0013

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    Web page: http://www.econ.cam.ac.uk/index.htm

    Related research

    Keywords: franchising; regulation; efficiency wages; agriculture; asset-specificity; power; contracts;

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    1. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    2. Brickley, J.A. & Dark, F.H. & Weisbach, M.S., 1988. "The Economic Effects Of Franchise Termination Laws," Papers 88-11, Rochester, Business - Managerial Economics Research Center.
    3. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
    4. Klein, Benjamin, 1995. "The economics of franchise contracts," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 9-37, October.
    5. Dnes, Antony W, 1993. "A Case-Study Analysis of Franchise Contracts," The Journal of Legal Studies, University of Chicago Press, vol. 22(2), pages 367-93, June.
    6. Smith, Richard L, II, 1982. "Franchise Regulation: An Economic Analysis of State Restrictions on Automobile Distribution," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 125-57, April.
    7. Howard Beales, J. III & Muris, Timothy J., 1995. "The foundations of franchise regulation: Issues and evidence," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 157-197, October.
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    Cited by:
    1. Lee, Myoungki & Wu, Steven Y., 2005. "Termination Damages and Relational Contracts," 2005 Annual meeting, July 24-27, Providence, RI 19184, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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