Asset Specificity and Hold-up in Franchising and Grower Contracts: A Theoretical Rationale for Government Regulation?
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.
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bengt Holmstrom, 1997.
"Moral Hazard and Observability,"
Levine's Working Paper Archive
1205, David K. Levine.
- 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 101-32, April.
- Brickley, J.A. & Dark, F.H. & Weisbach, M.S., 1988. "The Economic Effects Of Franchise Termination Laws," Papers 88-11, Rochester, Business - Managerial Economics Research Center.
- Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
- Dnes, Antony W, 1993. "A Case-Study Analysis of Franchise Contracts," The Journal of Legal Studies, University of Chicago Press, vol. 22(2), pages 367-93, June.
- Klein, Benjamin, 1995. "The economics of franchise contracts," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 9-37, October.
- 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.
- 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 125-57, April.
When requesting a correction, please mention this item's handle: RePEc:cam:camdae:0013. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jake Dyer)
If references are entirely missing, you can add them using this form.