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

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  • Lin, Stephen F.
  • Thomas, Catherine
  • Kalnins, Arturs

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.

Suggested Citation

  • Lin, Stephen F. & Thomas, Catherine & Kalnins, Arturs, 2020. "In-house and arm's length: productivity heterogeneity and variation in organizational form," LSE Research Online Documents on Economics 115327, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:115327
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    File URL: http://eprints.lse.ac.uk/115327/
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    2. Ackermann, Jeff, 2024. "The effects of franchising on stores, competitors, and consumers," International Journal of Industrial Organization, Elsevier, vol. 93(C).

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    More about this item

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production

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