Giorgio Zanarone

Vertical Restraints and the Law: Evidence from Automobile Franchising

After a 2002 European Commission regulation prohibited the use of dealer‐exclusive territories, automobile franchise contracts in Italy introduced price ceilings and standards on verifiable marketing and service inputs, such as advertising and salespeople. The contracts also imposed quantity floors, a practice already in use before the regulatory change. The introduction of standards suggests that, consistent with a view of vertical restraints as coordination mechanisms, manufacturers used exclusive territories to induce desired dealer services, and, once the use of exclusive territories was prohibited, they switched to alternative contractual devices to achieve this goal. The introduction of price ceilings despite free intrabrand competition also suggests that car manufacturers tried to prevent some dealers from gaming the quantity floors by selling to other dealers’ customers while charging monopolistic prices at their own locations.

On the Determinants and Consequences of Informal Contracting

As documented by Macauley (1963) and others, informal contracts are pervasive in modern economies. Yet, systematic empirical evidence on them is still limited. In this paper, we provide a framework to investigate the determinants and consequences of informal contracts. First, we present a model that organizes key predictions from the theoretical literature. Next, we discuss selected empirical works that shed light on the model’s empirical relevance. Finally, we discuss strategies for testing theoretical predictions for which conclusive evidence is still missing, as well as unexplored research opportunities offered by available studies and data.

The Role of Relational Contracts in Inter-Firm Relationships: Theory and Evidence on Multiunit Franchising

This paper develops a model of relational contracting to help explain the prevalence of multiunit franchising; a phenomenon not fully understood in the literature. The model is used to derive a key prediction, which is that franchise systems with a greater propensity to engage in multiunit franchising will feature greater mutual cooperation between franchisor and franchisees. Evidence for this prediction is found in data on franchisee-franchisor litigation outcomes from a sample of franchise disclosures.

Property rights in sequential exchange

We analyze the “sequential exchange” problem in which traders have incomplete information on earlier contracts. We show that under sequential exchange, it is in general not possible to simultaneously implement two key features of markets – specialization between asset ownership and control, and impersonal trade. In particular, we show that in contrast with the conventional wisdom in economics, strong property rights—enforceable against subsequent buyers—may be detrimental to impersonal trade. Finally, we provide conditions under which a mechanism that overcomes the tradeoff between specialization and impersonal trade exists, and we characterize such mechanism. Our results provide an efficiency rationale for how property rights are enforced in business, company and real estate transactions, and for the ubiquitousness of “formalization” institutions that the literature has narrowly seen as entry barriers.

'Strategizing Calculus' in Industrial Procurement Contracts: Safeguarding Pre-Existing Resources versus Creating Value

Research on collaborative ties in business markets has pre-dominantly studied how governance forms balance potential gains and transaction hazards within the relationship. Using an incomplete contracting approach, we examine how the OEM trades off gains obtained within the relationship with its supplier against protection of resources that were developed outside such relationship. Adapting the recent theoretical model by Zanarone, Lo, and Madsen (2016) to the context of industrial markets, we hypothesize that OEMs with more valuable pre-existing resources choose closed-price contracts over open-price contracts to dis-incentivize suppliers from overinvesting in capabilities that may enable them to appropriate those resources. Consistent with this model, but not with alternative governance theories, our data on component procurement contracts show that: (1) OEMs tend to use closed-price contracts when their pre-existing resources are more valuable, and the use of closed-price contracts reduces both, (2) the supplier’s dedicated investment and, (3) its value-add to the OEM’s end product. Our work provides evidence on how parties, cognizant of the “dark side�? of entering inter-firm collaborations, strategically balance the conflicting goals of safeguarding pre-existing resources and creating value.