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

Authors: Arruñada, B; Garicano, L; Vázquez, L

Source: Journal of Law, Economics, and Organization, Volume 17, Number 1, April 2001 , pp. 257-284(28)

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Abstract:

We analyze empirically the allocation of rights and monetary incentives in automobile franchise contracts. All of these contracts substantially restrict the decision rights of dealers and grant manufacturers extensive rights to specify and enforce dealers' duties. The allocation of decision rights and incentive intensity differs across brands, however. This variation is explained by the incidence of moral hazard. In particular, when the cost of dealer moral hazard is higher and the risk of manufacturer opportunism is lower, manufacturers hold more rights to determine the performance required from their dealers and to use mechanisms such as monitoring, termination, and monetary incentives to ensure that such performance is provided.

Document Type: Research article

Publication date: 2001-04-01

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The Journal of Law, Economics, and Organization is an interdisciplinary exercise. It seeks to promote an understanding of many complex phenomena by examining such matters from a combined law, economics, and organization perspective (or a two-way combination thereof). In this connection, we use the term organization broadly - to include scholarship drawing on political science, psychology and sociology, among other fields. It also holds the study of institutions - especially economic, legal, and political institutions - to be specifically important and greatly in need of careful analytic study.