Franchise Contracts with Ex Post Limited Liability

Shane Evans ()
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Shane Evans: School of Economics and Finance, University of Tasmania, http://www.utas.edu.au/economics-finance/

No 10281, Working Papers from University of Tasmania, Tasmanian School of Business and Economics

Abstract: This paper examines the contracting relationship between a manufacturer and a retailer when the retailer has ex ante private information, and is subject to limited liability. The contract takes place over two periods. In the first period, the retailer can make a report of private information, or take an action, either of which in uences the manufacturer's beliefs about the distribution of demand states for a final good in the second period. In the second period, the retailer sells the manufacturers intermediate good into a final output market according to a variable fee schedule. The interaction of the limited liability constraints with incentive compatibility in the second stage gives rise to an expected surplus to the retailer, which the manufacturer can extract with a franchise fee. The franchise fee can also be used as a screening device or a means of eliciting the efficient first stage action from the retailer.

Keywords: Franchise Fee; Limited Liability; Vertical Restraints (search for similar items in EconPapers)
JEL-codes: D82 D86 L42 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2010-10-05, Revised 2010-10-05
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Published by the University of Tasmania. Discussion paper 2010-10

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