Incomplete Contracts and Corporate Governance: Theory and Evidence Case Studies on Chinese Banking and U.S. Franchising by CHEN Shaoling A Thesis Submitted to The Hong Kong University of Science and Technology in Partial Fulfillment of the Requirements for the Degree of Doctor of Philosophy in the Department of Economics, School of Business and Management August 2007, Hong Kong HKUST Library Reproduction is prohibited without the author’s prior written consent 3306803 3306803 2008 [...]... Organization RST: Resource Scarcity Theory AT: Agency Theory IFA: International Franchise Association IFAEF: International Franchise Association Educational Foundation USDOC: United States Department of Commerce BID: Branding-inherent Demand SAR: Spatial Autoregressive SMA: Spatial Moving Average Bond: Bond’s Franchise Guide Incomplete Contracts and Corporate Governance: Theory and Evidence Case Studies on. .. Corporate Governance: Theory and Evidence Case Studies on Chinese Banking and U.S Franchising by CHEN Shaoling Department of Economics School of Business and Management The Hong Kong University of Science and Technology Abstract This thesis applies the incomplete contract approach to studying the corporate governance in two cases: Chinese banking and U.S franchising, both of which are issues of great significance... from both academic and industrial applications However, recent events, such as the Enron scandal and other corporate governance failures, have put it on the front pages of our main newspapers Although none of us welcomes this kind of painful result, it has highlighted the important role that corporate governance plays in a modern economy and the consequences of getting it wrong And it has also strengthened... processes—allocation of control rights While in reality, most of these decision making processes are fulfilled through a series of contracts In recent years, the contract theory has become one of the most active fields of research in contemporary microeconomics Specifically, rather than the traditional theory of complete contracts which is closely related to the theory of implementation or mechanism design, the incomplete. .. incomplete contracts approach pioneered by Grossman and Hart (1986) and Hart and Moore (1990) as another branch can be more helpful to answer questions proposed above The advantage is, most future contingencies are hard to describe and foresee ex ante, and as a result, complete contracts are technologically infeasible and decisions on allocating residual control rights—i.e., the rights to make decisions under... simple allocation frameworks addressed in current models based on this approach (Shleifer & Vishny, 1997), or because a clear definition of incomplete contracts has not been agreed upon yet One popular view is that incomplete contract theorists restrict the class of contracts they consider to an ad hoc subset of complete contracts which are renegotiable (Huberman & Kahn, 1988; Aghion, Dawatripont & Rey,... foreseen by the contract—should be made in ex ante contracting The works by Agnion and Bolton (1992), Hart (1995), and Hart and Moore (1998) are such examples applying the incomplete contracts approach to explaining the efficiency of different allocations of control rights However, this incomplete contracts approach is still often criticized by some researchers either because the situation in practice... banks are closely related to current fluctuations of their own transformations and external competition environment The same incomplete contract approach is also applied to studying the corporate governance in U.S franchising, which as one typical governance structure mixing the features of both contracts and corporate organizations has rarely been taken into account since the prosperity during the period... the same time Second, the mixed governance structure as well as the uniform and time-invariant linear contract in franchising also confuses many economists This thesis establishes a two-period double-sided moral hazard model to study the dynamic decision making on governance structure and contracting of a franchise chain Our results suggest that both resource scarcity theory and agency theory work but... strategy in governance structure and the substituting strategy in contracting is consistent with the observed competition behavior and duopoly industrial structure in franchising xiii Chapter 1 Introduction Corporate governance is now a topic of considerable interest to a large and expanding cross-section of the community, which, until fairly recently, was not a topic that attracted enough attention from . Discussions 161 4.5.1 Preliminary Specification Tests 161 4.5.2 Regression Results and Robustness Tests 164 4.5.3 Discussions 167 4.6 Conclusions and Comments 171 Appendix A Proofs of Propositions,. Contracts and Corporate Governance: Theory and Evidence Case Studies on Chinese Banking and U. S. Franchising by CHEN Shaoling Department of Economics School of Business and Management The Hong. events, such as the Enron scandal and other corporate governance failures, have put it on the front pages of our main newspapers. Although none of us welcomes this kind of painful result, it has