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Asset Specificity and Hold-up in Franchising and Grower Contracts: A Theoretical Rationale for Government Regulation?

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  • Lewin-Solomons, S.

Abstract

There has been much controversy over the merits of government regulation to protect growers and franchisees from hold-up at the hands of integrators and franchisors. Typically, economic argument have discouraged regulation, since direct evidence for hold-up is weak and bargaining should yield second-best efficiency. This paper questions direct tests for hold-up, arguing that hold-up occurs only off the equilibrium path but nevertheless influences equilibrium payoffs as a couterfactual. Moreover, when markets do no clear, bargaining may fail to yield net efficiency. In such circumstances, integrators or franchisors will force excessively high levels of asset specificity onto growers or franchisees. And will insist that these small parties be excessively vulnerable to being dismissed, since such an arrangement shifts the distribution of wealth by alleviating the need for high efficiency wages. Market power aggravates this effect. Nevertheless, misguided regulations may also be detrimental if their dir ect economic effects are not well understood.

Suggested Citation

  • Lewin-Solomons, S., 2000. "Asset Specificity and Hold-up in Franchising and Grower Contracts: A Theoretical Rationale for Government Regulation?," Cambridge Working Papers in Economics 0013, Faculty of Economics, University of Cambridge.
  • Handle: RePEc:cam:camdae:0013 Note: L
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    References listed on IDEAS

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    1. Dnes, Antony W, 1993. "A Case-Study Analysis of Franchise Contracts," The Journal of Legal Studies, University of Chicago Press, vol. 22(2), pages 367-393, June.
    2. Brickley, James A & Dark, Frederick H & Weisbach, Michael S, 1991. "The Economic Effects of Franchise Termination Laws," Journal of Law and Economics, University of Chicago Press, vol. 34(1), pages 101-132, April.
    3. repec:mes:jeciss:v:30:y:1996:i:4:p:1212-1216 is not listed on IDEAS
    4. Klein, Benjamin, 1995. "The economics of franchise contracts," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 9-37, October.
    5. Smith, Richard L, II, 1982. "Franchise Regulation: An Economic Analysis of State Restrictions on Automobile Distribution," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 125-157, April.
    6. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    7. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, pages 433-444.
    8. Howard Beales, J. III & Muris, Timothy J., 1995. "The foundations of franchise regulation: Issues and evidence," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 157-197, October.
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    Cited by:

    1. Lee, Myoungki & Wu, Steven Y., 2005. "Termination Damages and Relational Contracts," 2005 Annual meeting, July 24-27, Providence, RI 19184, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    2. Steven Y. Wu, 2010. "Producer Protection Legislation and Termination Damages in the Presence of Contracting Frictions," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 92(1), pages 28-41.

    More about this item

    Keywords

    franchising; regulation; efficiency wages; agriculture; asset-specificity; power; contracts;

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers
    • K2 - Law and Economics - - Regulation and Business Law
    • L0 - Industrial Organization - - General
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General

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