Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution

By Benito Arruñada, Luis Garicano, Luis Vázquez. 2001

221 citations recorded by the source corpus.

We analyze empirically the allocation of rights and monetary incentives in automobile franchise contracts. These contracts substantially restrict the decision rights of dealers and grant manufacturers extensive contractual completion and enforcement powers, converting the manufacturers, de facto, in a sort of quasi-judiciary instance. Variation in the allocation of decision rights and incentive intensity is explained by the incidence of moral hazard in the relation. In particular, when the cost of dealer moral hazard is higher and the risk of manufacturer opportunism is lower, manufacturers enjoy more discretion in determining the performance required from their dealers and in using mechanisms such as monitoring, termination and monetary incentives to ensure such performance is provided. We also explore the existence of interdependencies between the different elements of the system. and find some complementarities between completion and termination rights, and between monitoring rights and the intensity of incentives.

Subfields: Economics and Econometrics, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/03af696f49302824e7f14ffe6091865059d545c5

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Citations in the corpus

How to Design Franchise Contracts: The Role of Contractual Hazards and Experience (2012, unknown): “…that the probability of opportunistic behavior by the franchisor is smaller (Eggleston, Posner, & Zeckhauser, 2000) because such behavior would damage its reputation and limit the possibility of attracting new franchisees in the future (Klein, 1980; Klein & Murphy, 1997; Arruñada et al., 2001).”
Network Effects in the Governance of Strategic Alliances (2006, unknown): “Arruñada et al. (2001), for example, study the allocation of decision-making rights in automobile manufacturer/dealer contracts and find that more rights are allocated to manufacturers when their opportunism can be controlled by their reputation. Similarly, Corts and Singh (2004) show that repeated ”
Decentralization, Hierarchies, and Incentives: A Mechanism Design Perspective (2006, background): “ Arrunada et al (2001) explain the prevalence of delegation by the presence of ‘twosided moral hazard’, i.e., the possibility of opportunistic ex post renegotiation of contracts by manufacturers.”
Performance and completeness in repeated inter-firm relationships: the case of franchising (2010, background): “They are aware that the probability of opportunistic behavior by the franchisor is very small (Eggleston et al. 7 2000) because such behavior would damage its reputation and limit the possibility of attracting new franchisees in the future (Klein 1980; Klein and Murphy 1997; Arruñada et al. 2001).”
Centralization of franchising networks: evidence from the Austrian franchise sector (2004, background): “Compared to the agency and transaction cost theoretical view of Arrunada et al. (2001), we develop a property rights approach of the allocation of decision rights.”