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In-house and arm's length: productivity heterogeneity and variation in organizational form

Lin, Stephen F., Thomas, Catherine ORCID: 0000-0002-7783-9758 and Kalnins, Arturs (2020) In-house and arm's length: productivity heterogeneity and variation in organizational form. Journal of Law, Economics, and Organization, 36 (3). 415 - 460. ISSN 8756-6222

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Identification Number: 10.1093/jleo/ewaa003

Abstract

This paper analyzes firm boundaries in the US hotel industry. Hotel properties of a given brand are often managed either by a chain employee or by a franchisee. We document that brand properties with the lowest and the highest occupancy rates are more likely to be managed at arm's length by franchisees. Variation in organizational form is consistent with a model in which the incentives embodied in management contracts vary with property-level productivity. We infer that most hotel chains franchise low-productivity relationships to keep property-level fixed costs low and franchise the most productive relationships to create high-powered incentives for franchisees. Franchisees of high-productivity properties face stronger incentives than the managers of both chain-managed properties and low-productivity franchises because the performance incentives in franchise contracts are proportional to hotel revenues and complement the incentives from franchisees' property control rights.

Item Type: Article
Official URL: https://academic.oup.com/jleo
Additional Information: © 2020 The Authors
Divisions: Management
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
JEL classification: D - Microeconomics > D2 - Production and Organizations > D23 - Organizational Behavior; Transaction Costs; Property Rights
F - International Economics > F1 - Trade > F12 - Models of Trade with Imperfect Competition and Scale Economies
L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L23 - Organization of Production
Date Deposited: 09 Jun 2022 14:51
Last Modified: 13 Jul 2022 23:16
URI: http://eprints.lse.ac.uk/id/eprint/115327

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