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An Empirical Analysis of Self-Enforcement Mechanisms: Evidence from Hotel Franchising

Management Science, Forthcoming

46 Pages Posted: 9 May 2016  

Renata Kosova

Imperial College London

Giorgo Sertsios

Universidad de los Andes, Chile

Date Written: May 9, 2016

Abstract

The relational contracts literature suggests that a principal can improve contract self-enforceability by specifying initial requirements that increase the agent’s ex-post rents. Initial requirements specified in hotel franchise agreements — size and quality-tier of hotel — offer a unique empirical setting to test this. Using proprietary data on 5,547 new franchised hotels and their revenues, we find that hotels far away from their franchisor’s headquarters are larger, more likely to belong to a high-quality tier, and generate higher revenues ex-post. This supports the idea that the agent’s ex-post rents can serve as a substitute to the principal’s monitoring intensity in the mitigation of agency problems. Our findings shed light on how formal contract terms can influence informal (relational) contracts between business partners.

Keywords: Relational Contracts; Self-Enforcing Agreements; Hotels; Franchising

JEL Classification: L1; L2

Suggested Citation

Kosova, Renata and Sertsios, Giorgo, An Empirical Analysis of Self-Enforcement Mechanisms: Evidence from Hotel Franchising (May 9, 2016). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2777535 or http://dx.doi.org/10.2139/ssrn.2777535

Renata Kosova

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Giorgo Sertsios (Contact Author)

Universidad de los Andes, Chile ( email )

Mons. Álvaro del Portillo
Las Condes
Santiago, 12.455
Chile

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