Institutional Constraints on Organizations: The Case of Spanish Car Dealerships

We study the effect of organizational choice and institutions on the performance of Spanish car dealerships. Using outlet-level data from 1994, we find that vertically-integrated dealerships showed substantially lower labor productivity, higher labor costs and lower profitability than franchised ones. Despite these gaps in performance, no vertically-integrated outlet was separated until 1994, yet the few outlets that were eventually separated systematically improved their performance. We argue that the conversion of integrated outlets into franchised ones involved significant transaction costs, due to an institutional environment favoring permanent, highly-unionized employment relations. In line with this argument, we find that the observed separations occurred in distribution networks that underwent marked reductions in worker unionization rates, following the legalization of temporary labor contracts.