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

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Author Info
Benito Arruñada ()
Luis Garicano
Luis Vázquez

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

Other versions of this item:

Find related papers by JEL classification:
L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
K12 - Law and Economics - - Basic Areas of Law - - - Contract Law

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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 & 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:
  2. Benito Arruñada, 2000. "Gestión de la competencia en el sector público," Economics Working Papers 490, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  3. 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:
  4. 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!]
  5. 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!]
  6. Magali Chaudey & Muriel Fadairo, 2009. "Double-Sided Externalities and Vertical Contracting : Evidence from European Franchising Data," Working Papers hal-00376243_v1, HAL. [Downloadable!]
  7. Benito Arruñada, 2004. "Quality safeguards and regulation of online pharmacies," Health Economics, John Wiley & Sons, Ltd., vol. 13(4), pages 329-344. [Downloadable!]
  8. 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!]
  9. 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:
  10. 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!]
  11. 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)
  12. 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)
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