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Contract Mix and Ownership

Author

Listed:
  • Chong-en Bai

    (Boston College)

  • Zhigang Tao

    (Hong Kong University of Science and Technology)

Abstract

This paper analyzes a model with many homogeneous agents, whose effort can be allocated to two tasks. One task produces a public good that is an important input for the production of the final output. The other task only affects the agent's own output. We show that, when the public input and the private input are complementary, the principal should offer a fixed-wage contract to some agents and a revenue-sharing contract to the remaining agents. Furthermore, we show that, when the ex ante contracts are subject to ex post renegotiation, agents with the fixed-wage contract should not own any asset, whereas agents with the revenue-sharing contract should own the physical asset in which the private input is embedded. Meanwhile, the principal should retain residual rights of control over the public good. This paper offers an explanation of the co-existence of company-owned units and franchised units in a franchise company. It adopts and extends important features from both the multi-task theory of the firm and the incomplete-contract theory of the firm.

Suggested Citation

  • Chong-en Bai & Zhigang Tao, 1997. "Contract Mix and Ownership," Boston College Working Papers in Economics 345., Boston College Department of Economics.
    • Handle: RePEc:boc:bocoec:345
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. Thorolfur Matthiasson, 1997. "Fixed wage or share: Contingent contract renewal and skipper motivation," Labor and Demography 9702002, University Library of Munich, Germany.

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    More about this item

    Keywords

    contract mix; ownership structure; contractual incompleteness; multitask; franchise;
    All these keywords.

    JEL classification:

    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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