Effort and Compensation in Relational Contracts

52 Pages Posted: 8 Feb 2018

See all articles by Desmond (Ho-Fu) Lo

Desmond (Ho-Fu) Lo

Santa Clara University, Department of Marketing

Heikki Rantakari

University of Rochester - Simon Business School

Date Written: January 22, 2018

Abstract

To generate downstream sales, manufacturers often spend both effort and compensation when working with their dealers. Existing theories are inconclusive about the interdependent role of the two kinds of instruments in motivating dealer effort; that is, whether they are substitutes or complements. There is little empirical evidence to inform their relations either. We first examine the conditions that determine the interdependencies among monetary compensation – both formal and informal – and manufacturer effort in a game-theoretical framework. We show that monetary compensation and manufacturer effort are complementary instruments in motivating dealer effort if the manufacturer’s effort is primarily about monitoring. They become substitutes when the manufacturer’s effort is primarily productive and thus provides indirect compensation. We then empirically illustrate some of these novel predictions in the distribution channel of the leading manufacturer of a computer accessory and its sixty dealerships in China. In particular, evidence from company archival and survey data shows complementarity between informal compensation and manufacturer effort in motivating dealer effort. This result appears to hold only when the dealers are situated in highly relational contexts. Theoretical and managerial implications are drawn from our analyses.

Keywords: Distribution channels, Incentives, Monitoring, Effort, Agency Theory, Relational Contract, Sales Force

JEL Classification: L14, L81, M21, M31

Suggested Citation

Lo, Desmond (Ho-Fu) and Rantakari, Heikki, Effort and Compensation in Relational Contracts (January 22, 2018). Available at SSRN: https://ssrn.com/abstract=3113510 or http://dx.doi.org/10.2139/ssrn.3113510

Desmond (Ho-Fu) Lo (Contact Author)

Santa Clara University, Department of Marketing ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States

HOME PAGE: http://www.scu.edu/business/marketing/faculty/lo.cfm

Heikki Rantakari

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

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