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

Posted: 30 Aug 2001  

Benito Arruñada

Pompeu Fabra University

Luis Garicano

University of Chicago - Booth School of Business - Economics; Centre for Economic Policy Research (CEPR)

Luis Vázquez

Universidad de Salamanca

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Abstract

We analyze empirically the allocation of rights and monetary incentives in automobile franchise contracts. All of these contracts substantially restrict the decision rights of dealers and grant manufacturers extensive rights to specify and enforce dealers' duties. The allocation of decision rights and incentive intensity differs across brands, however. This variation is explained by the incidence of moral hazard. In particular, when the cost of dealer moral hazard is higher and the risk of manufacturer opportunism is lower, manufacturers hold more rights to determine the performance required from their dealers and to use mechanisms such as monitoring, termination and monetary incentives to ensure that such performance is provided.

Key Words: Franchising; Contracts; Self-enforcement; Incentives; Complementarities; Automobiles

JEL Classification: L14, L22, L81, K12

Suggested Citation

Arruñada, Benito and Garicano, Luis and Vázquez, Luis, Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution. The Journal of Law, Economics, and Organization, Vol. 17, pp. 257-284, 2001. Available at SSRN: https://ssrn.com/abstract=271465

Benito Arruñada (Contact Author)

Pompeu Fabra University ( email )

Ramon Trias Fargas 25-27
Department of Economics and Business
Barcelona, 08005
Spain
+34 93 542 25 72 (Phone)
+34 93 542 17 46 (Fax)

HOME PAGE: http://www.econ.upf.edu/~arrunada

Luis Garicano

University of Chicago - Booth School of Business - Economics ( email )

Graduate School of Business
1101 East 58th Street
Chicago, IL 60637
United States
773-834-2862 (Phone)
773-702-0458 (Fax)

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Luis Vázquez

Universidad de Salamanca ( email )

Campus Miguel de Unamuno
37008 Salamanca, Salamanca 23007
Spain
+34 923 294 640 Ext. 3174 (Phone)
+34 923 294 715 (Fax)

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