The Role of Decision Rights in Incomplete Contracts: Lessons from Automobile Franchising
Abstract: Automobile franchise contracts allocate between manufacturers and dealers the rights to choose future terms of trade. Independent of who is assigned these rights, manufacturers dictate performance standards, and dealers implement them in exchange for discounts on the wholesale price of cars, which manufacturers can change at will even after dealers have performed. These practices suggest formal decision rights are not instruments to efficiently divide surplus when contracting the terms of trade ex post, as implied by models in the property rights tradition. They suggest, instead, that contracting the terms of trades ex post is costly, and that manufacturers act as specialized decision-makers for the dealership network as a whole. In this context, formal decision rights may be a last resort against the manufacturers’ temptation to impose opportunistic decisions and the dealers’ temptation to reject efficient but costly ones.