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.
|Date of creation:||05 Oct 2010|
|Date of revision:||05 Oct 2010|
|Publication status:||Published by the University of Tasmania. Discussion paper 2010-10|
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- 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.
- Martimort, David & Piccolo, Salvatore, 2007.
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- Oliver D. Hart & Jean Tirole, 1988. "Contract Renegotiation and Coasian Dynamics," Review of Economic Studies, Oxford University Press, vol. 55(4), pages 509-540.
- Oliver D. Hart & Jean Tirole, 1987. "Contract Renegotiation and Coasian Dynamics," Working papers 442, Massachusetts Institute of Technology (MIT), Department of Economics.
- Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February. Full references (including those not matched with items on IDEAS)
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