Working Paper: CEPR ID: DP13190
Authors: Catherine Thomas; Stephen Lin; Arturs Kalnins
Abstract: This paper analyzes how firms are organized in the U.S. hotel management industry. For most hotel brands, properties with intermediate room occupancy rates are relatively more likely to be managed by company employees rather than by independent franchisees. Properties with the lowest and the highest occupancy rates tend to be managed by franchisees, at arm's length from the hotel chain. This 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 work harder 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 arising from having control over the property.
Keywords: firm heterogeneity; firm structure; incomplete contracts; outsourcing
JEL Codes: D23; F12; L23; D22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| occupancy rates (R21) | organizational form (L22) |
| intermediate occupancy rates (R21) | in-house management (M54) |
| low occupancy rates (R21) | franchise management (L14) |
| high occupancy rates (R21) | franchise management (L14) |
| occupancy rates (R21) | probability of chain management (C69) |
| performance incentives (M52) | productivity at high occupancy levels (D24) |
| organizational form (L22) | decision-making in hotel industry (Z30) |