This paper analyzes firm boundaries in the US hotel industry. Hotel properties of a given brand are often managed either by a chain employee or by a franchisee. We document that brand properties with the lowest and the highest occupancy rates are more likely to be managed at arm's length by franchisees. Variation in organizational form is consistent with a model in which the incentives embodied in management contracts vary with property-level productivity. We infer that most hotel chains franchise low-productivity relationships to keep property-level fixed costs low and franchise the most productive relationships to create high-powered incentives for franchisees. Franchisees of high-productivity properties face stronger incentives than the managers of both chain-managed properties and low-productivity franchises because the performance incentives in franchise contracts are proportional to hotel revenues and complement the incentives from franchisees' property control rights.

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1 November 2020

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The Journal of Law, Economics, and Organization 36(3) , pp.415-460, 2020

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DOI: 10.1093/jleo/ewaa003

https://academic.oup.com/jleo/advance-article/doi/10.1093/jleo/ewaa003/5828342

This Journal article is published under the centre's Trade programme.

This publication comes under the following theme: Global firms