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Completing Contracts Ex Post: How Car Manufacturers Manage Car Dealers

Review of Law and Economics, Vol. 1, No. 1, pp. 149-173, 2005

UPF Economics and Business Working Paper Series 267

22 Pages Posted: 7 Dec 2005 Last revised: 1 Aug 2011

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

Abstract

This article illustrates how contracts are completed ex post in practice and, in so doing, indirectly suggests what the real function of contracts may be. Our evidence comes from the contracts between automobile manufacturers and their dealers in 23 dealership networks in Spain. Franchising dominates automobile distribution because of the need to decentralize pricing and control of service decisions. It motivates local managers to undertake these activities at minimum cost for the manufacturer. However, it creates incentive conflicts, both between manufacturers and dealers and among dealers themselves, concerning the level of sales and service provided. It also holds potential for expropriation of specific investments. Contracts deal with these conflicts by restricting dealers' decision rights and granting manufacturers extensive completion, monitoring and enforcement powers. The main mechanism that may prevent abuse of these powers is the manufacturers' reputational capital.

Keywords: Franchising, incomplete contracts, self-enforcement, automobile, cars

JEL Classification: L14, L22, L62, L81, K12

Suggested Citation

Arruñada, Benito and Garicano, Luis and Vázquez, Luis, Completing Contracts Ex Post: How Car Manufacturers Manage Car Dealers. Review of Law and Economics, Vol. 1, No. 1, pp. 149-173, 2005 . Available at SSRN: https://ssrn.com/abstract=868345 or http://dx.doi.org/10.2139/ssrn.868345

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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