Principals and Their Car Dealers: What Do Targets Tell About Their Relation?

Abstract

The paper tries to establish for a large European car dealership whether target ratcheting and target achievements are associated with the type of contract offered to the franchisee in the dealership. We find that the franchisor sets different targets within a common stair-step incentive scheme conditional on whether or not the car dealer (franchisee) acquire the cars they sell exclusively from the franchisor. We also find that compared to non-exclusive dealers, exclusive dealers work harder to achieve their targets and are less likely to mute their effort when their target achievement is relatively high. We argue that the evidence we present is consistent with the ideas put forward in relational-contracts theory.