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

Renáta Kosová () and Giorgo Sertsios
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Renáta Kosová: Business School, Imperial College London, London SW7 2AZ, United Kingdom

Management Science, 2018, vol. 64, issue 1, 43-63

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 the 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: industrial organization; firm objectives; organization and behavior; market structure; firm strategy; market performance (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:64:y:2018:i:1:p:43-63

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