The Effect of a Technology Shock on Contract Form: Revenue-Sharing in Movie Exhibition and the Coming of Sound

Posted: 9 Aug 2000

See all articles by F. Andrew Hanssen

F. Andrew Hanssen

Clemson University - John E. Walker Department of Economics

Abstract

During the silent era, movie producers rented the vast majority of their films to exhibitors for flat per-day fees. A technology "shock" in the form of the coming of sound led to the widespread replacement of flat fees by revenue-sharing. This paper seeks to determine why. It finds that sound technology altered the structure of incentives in movie exhibition, reducing the role of the exhibitor (which decreased concern about exhibitor shirking), reducing the cost of dividing attendance revenue ex post (necessary for revenue-sharing), and increasing the uncertainty over film values (at least initially), thus raising the cost of negotiating a mutually acceptable?to producer and exhibitor?lump sum payment. As a result, percent-of-gross pricing replaced flat rental fees. These findings allow additional light to be shed on the reasons for share contracts in general?most previous studies have been limited to an examination a cross-section of contracts.

JEL Classification: N82

Suggested Citation

Hanssen, F., The Effect of a Technology Shock on Contract Form: Revenue-Sharing in Movie Exhibition and the Coming of Sound. Available at SSRN: https://ssrn.com/abstract=236096

F. Hanssen (Contact Author)

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States

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