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Contracts, Externalities, and Incentives in Shopping Malls

  • Eric D. Gould

    (Hebrew University, CEPR, and IZA)

  • B. Peter Pashigian

    (Graduate School of Business, University of Chicago)

  • Canice J. Prendergast

    (Graduate School of Business, University of Chicago)

This paper demonstrates that mall store contracts are written to internalize externalities through both an efficient allocation and pricing of space, and an efficient allocation of incentives across stores. Certain stores generate externalities by drawing customers to other stores, whereas many stores primarily benefit from external mall traffic. Therefore, to varying degrees, the success of each store depends upon the presence and effort of other stores, and the effort of the developer to attract customers to the mall. Using a unique data set of mall tenant contracts, we show that rental contracts are written to (i) efficiently price the net externality of each store and (ii) align the incentives to induce optimal effort by the developer and each mall store according to the externality of each store's effort. © 2005 President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Article provided by MIT Press in its journal Review of Economics and Statistics.

Volume (Year): 87 (2005)
Issue (Month): 3 (August)
Pages: 411-422

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Handle: RePEc:tpr:restat:v:87:y:2005:i:3:p:411-422
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  1. Joseph E. Stiglitz, 1973. "Incentives and Risk-Sharing in Sharecropping," Cowles Foundation Discussion Papers 353, Cowles Foundation for Research in Economics, Yale University.
  2. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
  3. R. Preston McAfee & John McMillan, 1987. "Competition for Agency Contracts," RAND Journal of Economics, The RAND Corporation, vol. 18(2), pages 296-307, Summer.
  4. Brueckner, Jan K, 1993. "Inter-store Externalities and Space Allocation in Shopping Centers," The Journal of Real Estate Finance and Economics, Springer, vol. 7(1), pages 5-16, July.
  5. Benjamin, John D. & Boyle, Glenn W. & Sirmans, C. F., 1992. "Price discrimination in shopping center leases," Journal of Urban Economics, Elsevier, vol. 32(3), pages 299-317, November.
  6. Rauch, James E, 1993. "Does History Matter Only When It Matters Little? The Case of City-Industry Location," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 843-67, August.
  7. Francine Lafontaine & Kathryn L. Shaw, 1999. "The Dynamics of Franchise Contracting: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 1041-1080, October.
  8. Asher Wolinsky, 1983. "Retail Trade Concentration Due to Consumers' Imperfect Information," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 275-282, Spring.
  9. Canice Prendergast, 1999. "The Provision of Incentives in Firms," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 7-63, March.
  10. Pashigian, B Peter & Gould, Eric D, 1998. "Internalizing Externalities: The Pricing of Space in Shopping Malls," Journal of Law and Economics, University of Chicago Press, vol. 41(1), pages 115-42, April.
  11. Edward P. Lazear, 2000. "Performance Pay and Productivity," American Economic Review, American Economic Association, vol. 90(5), pages 1346-1361, December.
  12. John D. Benjamin & Glenn W. Boyle & C. F. Sirmans, 1990. "Retail Leasing: The Determinants of Shopping Center Rents," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(3), pages 302-312.
  13. Cheung, Steven N S, 1969. "Transaction Costs, Risk Aversion, and the Choice of Contractual Arrangements," Journal of Law and Economics, University of Chicago Press, vol. 12(1), pages 23-42, April.
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