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Contractual allocation of decision rights and incentives: The case of automobile distribution

Benito Arruñada (), Luis Garicano () and Luis Vázquez

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We analyze empirically the allocation of rights and monetary incentives in automobile franchise contracts. These contracts substantially restrict the decision rights of dealers and grant manufacturers extensive contractual completion and enforcement powers, converting the manufacturers, de facto, in a sort of quasi-judiciary instance. Variation in the allocation of decision rights and incentive intensity is explained by the incidence of moral hazard in the relation. In particular, when the cost of dealer moral hazard is higher and the risk of manufacturer opportunism is lower, manufacturers enjoy more discretion in determining the performance required from their dealers and in using mechanisms such as monitoring, termination and monetary incentives to ensure such performance is provided. We also explore the existence of interdependencies between the different elements of the system. and find some complementarities between completion and termination rights, and between monitoring rights and the intensity of incentives.

Keywords: Franchising; contracts; self-enforcement; incentives; complementarities; automobiles (search for similar items in EconPapers)
JEL-codes: K12 L14 L22 L81 (search for similar items in EconPapers)
Date: 1999-10
New Economics Papers: this item is included in nep-ind and nep-law
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Journal Article: Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution (2001)
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