Centralized and Decentralized Contracts in a Moral Hazard Environment

Inés Macho‐Stadler · David Pérez‐Castrillo

60 citations0/0 files storedJournal of Industrial Economics

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Auction Theory and Applications Merger and Competition Analysis Franchising Strategies and Performance

Abstract

We study the optimal allocation of the contracting capacity in a moral hazard environment. Centralizing is superior when the principal is able to establish all the contracts with the agents simultaneously and she is able to monitor side contracting between the agents. Otherwise, decentralizing can be a superior strategy. We apply our results to a firm’s decision on which outlets to franchise. They suggest that franchising is more likely to occur the further the store is from headquarters, the more isolated it is and in those activities where the risk is low. This conclusion is consistent with empirical studies.

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References

1991Multitask Principal–Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design 1982Moral Hazard in Teams 1988Information, Incentives and Bargaining in the Japanese Economy 1986Hierarchies and Bureaucracies: On the Role of Collusion in Organizations 1992Agency Theory and Franchising: Some Empirical Results 1987The choice of organizational form The case of franchising 2014Transaction Cost Economics 1982Optimal coordination mechanisms in generalized principal–agent problems

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2015Performance Aggregation and Decentralized Contracting 2014A multiscale decision theory analysis for revenue sharing in three-stage supply chains 2013Decentralized Task Assignment and Centralized Contracting: On the Optimal Allocation of Authority

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