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

Kalnins, Arturs, Lin, Stephen F. and Thomas, Catherine (2018) In-house and arm’s length: productivity heterogeneity and variation in organizational form. CEP Discussion Papers (CEPDP1579). Centre for Economic Performance, London School of Economics and Political Science, London, UK.

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Abstract

This paper analyzes how firms are organized in the U.S. hotel management industry. For most hotel brands, properties with intermediate room occupancy rates are relatively more likely to be managed by company employees rather than by independent franchisees. Properties with the lowest and the highest occupancy rates tend to be managed by franchisees, at arm's length from the hotel chain. This 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 work harder 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 arising from having control over the property.

Item Type: Monograph (Discussion Paper)
Official URL: http://cep.lse.ac.uk/
Additional Information: © 2018 The Authors
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HD Industries. Land use. Labor
JEL classification: D - Microeconomics > D2 - Production and Organizations
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
Sets: Research centres and groups > Centre for Economic Performance (CEP)
Date Deposited: 11 Jan 2019 12:48
Last Modified: 10 Nov 2019 00:49
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/91702

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