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Completing contracts ex post: How car manufacturers manage car dealers

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  • Benito Arruñada

    ()

  • Luis Garicano
  • Luis Vázquez

Abstract

This article illustrates how contracts are completed ex post in practice and, in so doing, indirectly suggests what the real function of contracts may be. Our evidence comes from the contracts between automobile manufacturers and their dealers in 23 dealership networks in Spain. Franchising dominates automobile distribution because of the need to decentralize pricing and control of service decisions. It motivates local managers to undertake these activities at minimum cost for the manufacturer. However, it creates incentive conflicts, both between manufacturers and dealers and among dealers themselves, concerning the level of sales and service provided. It also holds potential for expropriation of specific investments. Contracts deal with these conflicts by restricting dealers’ decision rights and granting manufacturers extensive completion, monitoring and enforcement powers. The main mechanism that may prevent abuse of these powers is the manufacturers’ reputational capital.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 267.

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Date of creation: Sep 1998
Date of revision: Jul 2004
Handle: RePEc:upf:upfgen:267

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Web page: http://www.econ.upf.edu/

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Keywords: Franchising; incomplete contracts; self-enforcement; automobile;

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References

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Cited by:
  1. Jia, Xiangping & Hu, Yamei & Hendrikse, George & Huanga, Jikun, 2010. "Centralized versus individual: Governance of farmer professional cooperatives in China," IAMO Forum 2010: Institutions in Transition – Challenges for New Modes of Governance 52699, Leib­niz Institute of Agricultural Development in Central and Eastern Europe (IAMO).
  2. Magali Aubert & Zouhair Bouhsina & Jean Marie Codron & Sylvain Rousset, 2013. "Pesticide safety risk, food chain organization, and the adoption of sustainable farming practices. The case of Moroccan early tomatoes," Working Papers 192816, Institut National de la Recherche Agronomique, France.
  3. Gaetano Martino & Paolo Polinori, 2011. "Productive process innovation as sequential adjustment of the hybrid governance structure: the case of the poultry sector," Quaderni del Dipartimento di Economia, Finanza e Statistica, Università di Perugia, Dipartimento Economia, Finanza e Statistica 88/2011, Università di Perugia, Dipartimento Economia, Finanza e Statistica.
  4. Martino, Gaetano & Frascarelli, Angelo, 2012. "Adaptation in Food Networks: Theoretical Frame Work and Empirical Evidences," 2012 International European Forum, February 13-17, 2012, Innsbruck-Igls, Austria, International European Forum on Innovation and System Dynamics in Food Networks 144981, International European Forum on Innovation and System Dynamics in Food Networks.
  5. Hu, Y. & Hendrikse, G.W.J., 2007. "Allocation of Decision Rights in Fruit and Vegetable Contracts in China," ERIM Report Series Research in Management, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasm ERS-2007-077-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  6. 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, Springer, vol. 11(1), pages 61-99, March.
  7. Alicia García-Herrera & Rafael Llorca-Vivero, 2010. "How time influences franchise contracts: the Spanish case," European Journal of Law and Economics, Springer, Springer, vol. 30(1), pages 1-16, August.
  8. Martino, Gaetano & Frascarelli, Angelo, 2012. "Adaptation in Food Networks: theoretical framework and empirical evidences," MPRA Paper 37600, University Library of Munich, Germany.

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