An empirical analysis of self-enforcement mechanisms: Evidence from hotel franchising

Renáta Kosová, Giorgo Sertsiosb*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

6 Scopus citations

Abstract

The relational contracts literature suggests that a principal can improve contract self-enforceability by specifying initial requirements that increase the agent's ex post rents. Initial requirements specified in hotel franchise agreements-size and quality tier of the hotel-offer a unique empirical setting to test this. Using proprietary data on 5,547 new franchised hotels and their revenues, we find that hotels far away from their franchisor's headquarters are larger, more likely to belong to a high quality tier, and generate higher revenues ex post. This supports the idea that the agent's ex post rents can serve as a substitute to the principal's monitoring intensity in the mitigation of agency problems. Our findings shed light on how formal contract terms can influence informal (relational) contracts between business partners.

Original languageEnglish
Pages (from-to)43-63
Number of pages21
JournalManagement Science
Volume64
Issue number1
DOIs
StatePublished - Jan 2018

Keywords

  • Firm objectives
  • Firm strategy
  • Industrial organization
  • Market performance
  • Market structure
  • Organization and behavior

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