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Journal article
In-house and arms length: productivity heterogeneity and variation in organizational form
Arturs Kalnins, Stephen F. Lin and Catherine Thomas November 2020
Paper No' :

JEL Classification: D23; F12; L23; D22

Tags: firm heterogeneity; firm structure; incomplete contracts; outsourcing

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.