To Do or to Teach? the Dichotomy Between Franchising Vs Management Contracts in the Hospitality Industry

Abstract: Although franchise and management contracts constitute the dominant way of organizing business-to-business relationships within hotel chains, no study has compared their relative performance. This paper aims to explain their differences and assess their impact on online scores, currently a key performance indicator in the hotel industry. We argue that franchises are less effective than management contracts for operating upscale hotels due to the relative advantages that the latter have in transferring and enforcing tacit knowledge, typically embedded in skilled staff and very relevant in such quality-tier hotels. Conversely, franchising is better for large hotels because, first, its incentive structure better addresses managerial shirking (typically more severe as hotel size increases) and, second, it offers advantages when the normalization of business procedures is key to success (as is true for large establishments). Our empirical findings broadly support these arguments in a dataset of 220 Spanish hotel groups, also providing evidence that no single organizational solution fits all situations.