In-House and Arm's Length: Productivity Heterogeneity and Variation in Organizational Form

53 Pages Posted: 24 Sep 2018

See all articles by Arturs Kalnins

Arturs Kalnins

Cornell University - School of Hotel Administration

Stephen F. Lin

Board of Governors of the Federal Reserve System

Catherine Thomas

London School of Economics & Political Science (LSE)

Date Written: September 2018

Abstract

This paper analyzes how firms are organized in the U.S. hotel management industry. For most hotel brands, properties with intermediate room occupancy rates are relatively more likely to be managed by company employees rather than by independent franchisees. Properties with the lowest and the highest occupancy rates tend to be managed by franchisees, at arm's length from the hotel chain. This variation in organizational form is consistent with a model in which the incentives embodied in management contracts vary with property-level productivity. We infer that most hotel chains franchise low productivity relationships to keep property-level fixed costs low and franchise the most productive relationships to create high powered incentives for franchisees. Franchisees of high-productivity properties work harder than the managers of both chain-managed properties and low-productivity franchises because the performance incentives in franchise contracts are proportional to hotel revenues and complement the incentives arising from having control over the property.

Keywords: Firm Heterogeneity, firm structure, Incomplete Contracts, Outsourcing

JEL Classification: D22, D23, F12, L23

Suggested Citation

Kalnins, Arturs and Lin, Stephen F. and Thomas, Catherine, In-House and Arm's Length: Productivity Heterogeneity and Variation in Organizational Form (September 2018). CEPR Discussion Paper No. DP13190, Available at SSRN: https://ssrn.com/abstract=3254225

Arturs Kalnins (Contact Author)

Cornell University - School of Hotel Administration ( email )

545D Statler Hall
Ithaca, NY 14853-6902
United States

Stephen F. Lin

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Catherine Thomas

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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