In-house and arm's length: productivity heterogeneity and variation in organizational form

Stephen F. Lin, Catherine Thomas and Arturs Kalnins

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: This paper analyzes firm boundaries in the US hotel industry. Hotel properties of a given brand are often managed either by a chain employee or by a franchisee. We document that brand properties with the lowest and the highest occupancy rates are more likely to be managed at arm's length by franchisees. 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 face stronger incentives 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 from franchisees' property control rights.

JEL-codes: D23 F12 L23 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2020-11-01
New Economics Papers: this item is included in nep-eff
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Journal of Law, Economics, and Organization, 1, November, 2020, 36(3), pp. 415 - 460. ISSN: 8756-6222

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:115327

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