Working Paper | HBS Working Paper Series | 2014

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

by Jan Bouwens, Eddy Cardinaels and Jingwen Zhang

Abstract

In this study we describe target setting and target achievements for a car dealership. Car dealers are eligible for a discount on the purchase price conditional on their achieving the sales targets set by the franchisor. We show that car dealers (franchisees) who exclusively deal in cars of the brand offered by the franchisor receive easier targets and are more likely to exert effort in achieving their targets compared to dealers who also acquire brands outside of the franchise network. As a consequence the exclusive dealers receive a relatively bigger cut of the total amount of discounts that dealers are offered conditional on their achieving sales targets set by the franchisor. We explain these results in terms of how much franchisors and franchisees believe that their relations will last or will be intensified in the future. We leverage on relational-contracts theory to develop our predictions and interpret our findings.

Keywords: Goals and Objectives; Motivation and Incentives; Franchise Ownership; Auto Industry; Retail Industry;

Citation:

Bouwens, Jan, Eddy Cardinaels, and Jingwen Zhang. "Principals and Their Car Dealers: What Do Targets Tell About Their Relation?" Harvard Business School Working Paper, No. 14-107, April 2014.