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Agency problems

1. An article in the Wall Street Journal reported that large hotel chains, such as Marriott, are tending to reduce the number of hotels that they franchise to outside owners and increase the number the chain owns and manages itself. Some chains are requiring private owners or franchisees to make upgrades in their hotels, but they are having a difficult time enforcing the policy. Marriott says the upgrading is important because "we've built our name on quality."

a.What type of agency problem is involved here?

b.Why would Marriott worry about the quality of hotels it doesn't own but franchises?

c.Why would a chain such as Marriott tend to own its hotels in resort areas, such as national parks, where there is little repeat business, and franchise in downtown areas, where there is a lot of repeat business? Think of the reputation effect and the incentive of franchises to maintain quality.

Solution Preview

a. Principal-agent problem exists between Mariott and its franchisees. This is because Mariott wants to maintain a certain level of quality at all its hotels. However, to maintain that level of quality requires capital investment by franchisees. The franchisees are not willing to invest that money in the hotels, because they see no interest in promoting the brand image of Mariott. All that the franchisees care about is their personal profits. By investing in the hotels, ...

Solution Summary

The solution discusses the problems being faced by Mariott hotels particularly Agency problems. The solution answers the question below and goes into quite a bit of detail for each of the three parts. An excellent response to the question being asked.

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