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Franchise Contracts with Ex Post Limited Liability

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    Abstract

    This paper examines the contracting relationship between a manufacturer and a retailer when the retailer has ex ante private information, and is subject to limited liability. The contract takes place over two periods. In the first period, the retailer can make a report of private information, or take an action, either of which in uences the manufacturer's beliefs about the distribution of demand states for a final good in the second period. In the second period, the retailer sells the manufacturers intermediate good into a final output market according to a variable fee schedule. The interaction of the limited liability constraints with incentive compatibility in the second stage gives rise to an expected surplus to the retailer, which the manufacturer can extract with a franchise fee. The franchise fee can also be used as a screening device or a means of eliciting the efficient first stage action from the retailer.

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    File URL: http://eprints.utas.edu.au/10281/1/DP2010_10_Evans_Franchise_Oct_2010.pdf
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    Bibliographic Info

    Paper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 10281.

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    Length: 40 pages
    Date of creation: 05 Oct 2010
    Date of revision: 05 Oct 2010
    Publication status: Published by the University of Tasmania. Discussion paper 2010-10
    Handle: RePEc:tas:wpaper:10281

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    Related research

    Keywords: Franchise Fee; Limited Liability; Vertical Restraints;

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    1. Martimort, David & Piccolo, Salvatore, 2007. "Resale price maintenance under asymmetric information," International Journal of Industrial Organization, Elsevier, vol. 25(2), pages 315-339, April.
    2. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347.
    3. Léonard,Daniel & Long,Ngo van, 1992. "Optimal Control Theory and Static Optimization in Economics," Cambridge Books, Cambridge University Press, number 9780521331586, October.
    4. Hart, Oliver D & Tirole, Jean, 1988. "Contract Renegotiation and Coasian Dynamics," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 509-40, October.
    5. Keith J. Crocker, 1983. "Vertical Integration and the Strategic use of Private Information," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 236-250, Spring.
    6. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
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