An Empirical Analysis of Self-enforcement Mechanisms: Evidence from Hotel Franchising
Abstract: The relational contracts literature suggests that a principal can improve contract self-enforceability by specifying initial conditions/requirements that increase the agent’s ex-post rents. Initial requirements specified in hotel franchise agreements — size and quality-tier of hotel — offer a unique empirical setting to test this. Using 2000-2008 data on 5,547 new franchised hotels and their revenues, we find that hotels far away from their franchisor’s headquarters are larger, more likely to be high-quality, and generate higher revenues ex-post. This supports the idea that the agent’s ex-post rents can serve as a substitute to the principal’s monitoring intensity in the mitigation of agency problems.
