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

Posted: 30 Aug 2001

See all articles by Benito Arruñada

Benito Arruñada

Pompeu Fabra University - Department of Economics and Business; Barcelona GSE

Luis Garicano

IE Business School; 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 - Department of Economics and Business ( 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

Barcelona GSE ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

Luis Garicano

IE Business School ( email )

Calle María de Molina, 11
Madrid, 28006
Spain

Centre for Economic Policy Research (CEPR)

London
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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