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Contractual Form, Retail Price and Asset Characteristics

Andrea Shepard

January 1992

Andrea Shepard, Revised January 1992

Predictions derived from a principal-agent analysis of the manufacturer-retailer relationship are derived and tested using microdata on contractual form, outlet characteristics and retail prices for gasoline stations in Eastern Massachusetts. The empirical results are consistent with upstream firms choosing contracts that have strong incentive characteristics but less direct control when asset characteristics make unobservable effort by downstream agents important. Manufacturers trade off incentive power for more direct control when observable effort is relatively more important. Retail prices are affected by the identity of the decisionmaker and are slightly lower when the upstream firm is allowed to directly control the retail price.

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