Completing Contracts Ex Post: How Car Manufacturers Manage Car Dealers
Arruñada, Benito, Luis Garicano and Luis Vázquez (2005), "Completing Contracts Ex Post: How Car Manufacturers Manage Car Dealers," Review of Law and Economics, 1(1), 149-173
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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.