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Franchise Contracts with Ex Post Limited Liability

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  • Shane B. Evans

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Abstract

This paper examines the contracting relationship between a manufacturer and a retailer when the retailer has ex ante private information, and is subject to limited liability. The contract takes place over two periods. In the first period, the retailer can make a report of private information, or take an action, either of which influences the manufacturer's beliefs about the distribution of demand states for a final good in the second period. In the second period, the retailer sells the manufacturers intermediate good into a final output market according to a variable fee schedule. The interaction of the limited liability constraints with incentive compatibility in the second stage gives rise to an expected surplus to the retailer, which the manufacturer can extract with a franchise fee. The franchise fee can also be used as a screening device or a means of eliciting the efficient first stage action from the retailer.

Suggested Citation

  • Shane B. Evans, 2010. "Franchise Contracts with Ex Post Limited Liability," ANU Working Papers in Economics and Econometrics 2010-529, Australian National University, College of Business and Economics, School of Economics.
  • Handle: RePEc:acb:cbeeco:2010-529
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    File URL: https://www.cbe.anu.edu.au/researchpapers/econ/wp529.pdf
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • L42 - Industrial Organization - - Antitrust Issues and Policies - - - Vertical Restraints; Resale Price Maintenance; Quantity Discounts

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