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Franchise Contracts with Ex Post Limited Liability

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 in uences 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.

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File URL: http://eprints.utas.edu.au/10281/1/DP2010_10_Evans_Franchise_Oct_2010.pdf
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Paper provided by University of Tasmania, School of Economics and Finance in its series Working Papers with number 10281.

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Length: 40 pages
Date of creation: 05 Oct 2010
Date of revision: 05 Oct 2010
Publication status: Published by the University of Tasmania. Discussion paper 2010-10
Handle: RePEc:tas:wpaper:10281
Contact details of provider: Postal: Private Bag 85, Hobart, Tasmania 7001
Phone: +61 3 6226 7672
Fax: +61 3 6226 7587
Web page: http://www.utas.edu.au/economics-finance/

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  1. repec:cup:cbooks:9780521331586 is not listed on IDEAS
  2. Oliver D. Hart & Jean Tirole, 1987. "Contract Renegotiation and Coasian Dynamics," Working papers 442, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. repec:cup:cbooks:9780521337465 is not listed on IDEAS
  4. Joseph J. Spengler, 1950. "Vertical Integration and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 58, pages 347.
  5. Salvatore Piccolo & David Martimort, 2003. "Resale Price Maintenance under Asymmetric Information," CSEF Working Papers 107, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy, revised 01 Apr 2007.
  6. Keith J. Crocker, 1983. "Vertical Integration and the Strategic use of Private Information," Bell Journal of Economics, The RAND Corporation, vol. 14(1), pages 236-250, Spring.
  7. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
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