Luis Vázquez

Completing Contracts Ex Post: How Car Manufacturers Manage Car Dealers

This article illustrates how contracts are completed ex post in practice and, in so doing, indirectly suggests what the real function of contracts may be. Our evidence comes from the contracts between automobile manufacturers and their dealers in 23 dealership networks in Spain. Franchising dominates automobile distribution because of the need to decentralize pricing and control of service decisions. It motivates local managers to undertake these activities at minimum cost for the manufacturer. However, it creates incentive conflicts, both between manufacturers and dealers and among dealers themselves, concerning the level of sales and service provided. It also holds potential for expropriation of specific investments. Contracts deal with these conflicts by restricting dealers’ decision rights and granting manufacturers extensive completion, monitoring and enforcement powers. The main mechanism that may prevent abuse of these powers is the manufacturers’ reputational capital.

Multi-unit versus single-unit franchising: assessing why franchisors use different ownership strategies

The aim of this article is to examine what factors underlie the choice of organisational form when franchisors add new franchised units to their networks. Franchisors may grant new units to existing franchisees (multi-unit franchising (MUF)) or to new franchisees (single-unit franchising). We find that this choice depends on the existence of contractual problems (namely adverse selection and moral hazard) and several network characteristics influence the magnitude of these problems. In particular, we found a positive relationship between the intensity of the use of MUF and network size, geographical concentration of the units of the network, and industries where customers tend to be non-repetitive.

How passive ownership restrictions affect the rate of franchisee failure

What variables influence the adoption of passive ownership restrictions in franchise systems and what are the effects of these restrictions on the rate of franchisee failure of such systems? This article shows how standard performance models that do not account for self-selection of these contractual decisions can improperly suggest a negative relationship between the adoption of passive ownership restrictions and a performance outcome of franchise systems – the rate of franchisee failure. However, models that do account for self-selection of these restrictions indicate that these contractual decisions per se do not affect such a performance outcome. The findings also show that franchise systems with misaligned passive ownership restrictions show a higher rate of franchisee failure than their better-aligned counterparts.

Proportion of Franchised Outlets and Franchise System Performance

This article explores how the proportion of franchised outlets in franchise systems influences two performance outcomes of these systems: the growth in sales per outlet and the proportion of outlets discontinued. It was found that franchise systems whose proportions of franchised outlets are misaligned according to agency theory show a higher proportion of outlets discontinued and lower growth in sales per outlet than their better aligned counterparts.

The choice of control devices in franchise chains

This article provides evidence on the determinants of the intensity in the use of three control types employed in franchise relationships: outcome-, behavior- and social-based control systems. This is accomplished by the integration and testing of two approaches, the agency and organizational theories. The results support the predictions of both theories for control strategies in franchise chains, and so it appears that the agency and organizational views are complementary in the field studied. The findings also show the existence of substitutabilities between the control types studied, and so such control types constitute a system of interdependent elements.

The Use of Up-front Fees, Royalties and Franchisor Sales to Franchisees in Business Format Franchising

This article provides evidence on the determinants of compensation provisions included in franchise contracts. The results support for both the optimal allocation of risk and double-sided moral hazard explanations for franchise contracts. The results also reveal that the value of both the initial and ongoing services provided by franchisors to franchisees strongly affects the compensation arrangements, which implies that a capital goal of these arrangements is to recover the costs of the services offered by franchisors.

Territorial Exclusivity in Franchisee Systems

This article shows that the higher the problems of hold-up and free-riding in franchise systems, the higher the probability that the franchisor will provide franchisees with territorial exclusivity. It therefore appears that territorial exclusivity is an assurance from a franchisor that the return on the sunk investments of a franchisee will not be subsequently held-up. Moreover, it appears that territorial exclusivity alleviates free-riding problem by making the franchisees local monopolists for the brand in question, which increases the probability that they will receive most of the benefits generated by their service provision.

Los efectos de la propiedad en los resultados empresariales: evidencia de los distribuidores de automóviles

RESUMEN Este trabajo estudia el comportamiento de una muestra de 223 explotaciones dedicadas a la comercialización de automóviles y a la prestación de servicios posventa. Las dos formas organizativas que se comparan son la propiedad y gestión directa por el fabricante frente a la gestión indirecta mediante «concesión» a un empresario independiente. Se pretende contrastar si los concesionarios independientes, en los cuales existe una menor separación entre propiedad y control, proporcionan mejores incentivos a los responsables de los puntos de venta. Los resultados ponen de relieve que la rentabilidad de las concesiones es superior en un 21,66 por 100 a la obtenida por las filiales. La productividad por empleado es también superior en un 5,52 por 100, al contrario que el coste laboral medio, que es inferior en un 10,07 por 100. Estas diferencias apenas cambian tras controlar por diversas variables de mercado.