Centralized and Decentralized Contracts in a Moral Hazard Environment

Inés Macho‐Stadler and J. David Pérez‐Castrillo
Authors registered in the RePEc Author Service: Ines Macho-Stadler and David Perez-Castrillo

Journal of Industrial Economics, 1998, vol. 46, issue 4, 489-510

Abstract: We study the optimal allocation of the contracting capacity in a moral hazard environment. Centralizing is superior when the principal is able to establish all the contracts with the agents simultaneously and she is able to monitor side contracting between the agents. Otherwise, decentralizing can be a superior strategy. We apply our results to a firm’s decision on which outlets to franchise. They suggest that franchising is more likely to occur the further the store is from headquarters, the more isolated it is and in those activities where the risk is low. This conclusion is consistent with empirical studies.

Date: 1998
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https://doi.org/10.1111/1467-6451.00084

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Working Paper: Centralized and Decentralized Contracts in a Moral Hazad Environment (1992)
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jindec:v:46:y:1998:i:4:p:489-510

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