Contract Adaptation under Legal Constraints

Abstract This paper shows theoretically that automobile distribution contracts can be seen as efficient responses to the manufacturers' obligation to offer non-discriminatory terms to dealers. This legal rule may prevent the parties from adapting contracts to new contingencies even when performance is ex post verifiable, as manufacturers may be unable to reach advantageous bargains with heterogeneous dealers using one-size-fits-all instruments. To circumvent the law and improve adaptation, manufacturers amend contracts informally, efficiently tailoring them to dealers' characteristics. Moreover, to make future informal amendments self-enforcing, contracts assign authority to manufacturers ex ante when the dealers are strongly averse to change, so manufacturers may be tempted to renege, ex post, on the large bonuses necessary to make them accept the amendments voluntarily. The model can be extended to employment, franchising and, more generally, to all contracts linking a central party to a set of parties with inferior bargaining power, where anti-discrimination rules may apply

The governance of vertical relationships

Mi tesis utiliza la noción de contrato relacional para explicar pautas aparentemente contraintuitivas de organización vertical. El primer capitulo muestra que, cuando existen externalidades entre empresas, la integración vertical reduce la tentación de sus ejecutivos de bajar el esfuerzo, haciendo sus promisas de cooperar más creibles. El segundo capitulo muestra que, cuando una regulación europea prohibió los territorios exclusivos en la distribución de automóviles, los fabricantes impusieron estándares de servicio y precios maximos, estos últimos para reducir la tentación de los concesionarios de romper pactos informales para no competir. El tercer capitulo muestra que, pese a la asignación simétrica de derechos de decisión en sus contratos de franquicia, los fabricantes de coches dictan estándares a los concesionarios, remunerandolos con descuentos discrecionales. Eso sugiere que los fabricantes son delegados informalmente para tomar decisiones, y usan sus podéres contractuales como recurso extremo contra la tentación de los concesionarios de rechazarlas.My thesis applies the notion of relational contracts to explain seemingly counterintuitive vertical arrangements. The first chapter shows that, in the presence of spillovers between an upstream and a downstream firm, vertical integration reduces the downstream manager's present gains from shirking, making her promise to cooperate with the upstream firm credible. The second chapter shows that, after a European regulation prohibited exclusive territories, car dealership contracts switched to a mix of service standards and price ceilings, and argues that price ceilings were introduced to reduce the dealers' short-run profits from reneging on an informal "no-compete" agreement. The third chapter shows that, despite the even allocation of decision rights in dealership contracts, car manufacturers dictate performance standards ex post, and reward dealers through discretionary discounts. This suggests manufacturers are informally delegated to set standards, and use formal decision rights as a last resort against the dealers' temptation to overturn their decisions

Vertical Restraints and the Law: Evidence from Automobile Franchising

After a 2002 European Commission regulation prohibited the use of dealer-exclusive territories, automobile franchise contracts in Italy introduced price ceilings and standards on verifiable marketing and service inputs, such as advertising and salespeople. The contracts also imposed quantity floors, a practice already in use before the regulatory change. The introduction of standards suggests that, consistent with a view of vertical restraints as coordination mechanisms, manufacturers used exclusive territories to induce desired dealer services, and, once the use of exclusive territories was prohibited, they switched to alternative contractual devices to achieve this goal. The introduction of price ceilings despite free intrabrand competition also suggests that car manufacturers tried to prevent some dealers from gaming the quantity floors by selling to other dealers' customers while charging monopolistic prices at their own locations. (c) 2009 by The University of Chicago. All rights reserved..

Endogenous Enforcement Institutions

Better legal institutions favor economic development, but only in States withsufficiently constrained executive power. We document this novel pattern acrossdeveloping countries, and build a simple model that illustrates how power, and theinstitutions that constrain or complement it, may affect development. We show that thereis a tradeoff between the two facets of power—enforcement and expropriation. As aruler’s power grows, his temptation not to enforce diminishes while the temptation toexpropriate grows. As a consequence, private enforcement optimally evolves into Stateenforcement, and legal institutions, which relax the ruler’s incentive constraint onenforcement, lose economic importance vis-à-vis political institutions, which limit theexecutive’s ability to expropriate. Our results are consistent with the observed crosscountrypatterns, as well as with historical evidence on the transition from the “LawMerchant” private enforcement system to the State.info:eu-repo/semantics/publishe