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Contractual allocation of decision rights and incentives: The case of automobile distribution

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  • Benito Arruñada

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  • Luis Garicano
  • Luis Vázquez

Abstract

We analyze empirically the allocation of rights and monetary incentives in automobile franchise contracts. These contracts substantially restrict the decision rights of dealers and grant manufacturers extensive contractual completion and enforcement powers, converting the manufacturers, de facto, in a sort of quasi-judiciary instance. Variation in the allocation of decision rights and incentive intensity is explained by the incidence of moral hazard in the relation. In particular, when the cost of dealer moral hazard is higher and the risk of manufacturer opportunism is lower, manufacturers enjoy more discretion in determining the performance required from their dealers and in using mechanisms such as monitoring, termination and monetary incentives to ensure such performance is provided. We also explore the existence of interdependencies between the different elements of the system. and find some complementarities between completion and termination rights, and between monitoring rights and the intensity of incentives.

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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 424.

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Date of creation: Oct 1999
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Handle: RePEc:upf:upfgen:424

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

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Keywords: Franchising; contracts; self-enforcement; incentives; complementarities; automobiles;

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