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An Empirical Analysis of Self-Enforcement Mechanisms: Evidence from Hotel Franchising

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  • Renáta Kosová

    (Business School, Imperial College London, London SW7 2AZ, United Kingdom)

  • Giorgo Sertsios

    (School of Business and Economics, Universidad de los Andes, Santiago, Chile)

Abstract

The relational contracts literature suggests that a principal can improve contract self-enforceability by specifying initial requirements that increase the agent’s ex post rents. Initial requirements specified in hotel franchise agreements—size and quality tier of the hotel—offer a unique empirical setting to test this. Using proprietary data on 5,547 new franchised hotels and their revenues, we find that hotels far away from their franchisor’s headquarters are larger, more likely to belong to a high quality tier, and generate higher revenues ex post. This supports the idea that the agent’s ex post rents can serve as a substitute to the principal’s monitoring intensity in the mitigation of agency problems. Our findings shed light on how formal contract terms can influence informal (relational) contracts between business partners.

Suggested Citation

  • Renáta Kosová & Giorgo Sertsios, 2018. "An Empirical Analysis of Self-Enforcement Mechanisms: Evidence from Hotel Franchising," Management Science, INFORMS, vol. 64(1), pages 43-63, January.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:1:p:43-63
    DOI: 10.1287/mnsc.2016.2563
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    References listed on IDEAS

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    2. Noel, Michael D. & Qiang, Hongjie, 2022. "Open price contracts, locked-in buyers, and opportunism," International Journal of Industrial Organization, Elsevier, vol. 85(C).
    3. Matthias Fahn & Giorgio Zanarone, 2021. "Pay Transparency under Subjective Performance Evaluation," Economics working papers 2021-02, Department of Economics, Johannes Kepler University Linz, Austria.
    4. Contreras Oscar F. & Giorgio Zanarone, 2018. "Managing Social Comparison Costs in Organizations," Working Papers 2018-25, Banco de México.
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