The Shopping Center Chronicles – Agency Theory

Application of agency theory to shopping centers is a matter of extending earlier works of what was called “common agency” to the shopping center scenario.

With common agency, tenants with inter-dependent interests coordinate behaviors through a landlord or developer. The objectives are to internalize the demand externalities present in the mall and ensure the landlord or developer provides effort necessary to benefit all the stores.

In a study by T.J. Miceli and C.F. Sirmans, the authors show that fixed rent leases and percentage rent leases combined with fixed rent, as shopping center leases are structured, prove inefficient as well. Maximization of shopping center profit requires three key factors: each store’s sales effort, the sales effort of all the other stores, and the effort of the landlord/developer.

With fixed rent leases, stores only consider their effort on their own sales, and not that of other stores. The same is shown for straight percentage rents. However, both of these together, combined with a lease cancelation clause that allows the landlord to cancel tenants’ leases when sales fall below target level, changes the circumstances. Under these conditions, each store considers other stores’ efforts and the landlord considers his or her overall marketing and other efforts for the mall.

In this context, the landlord’s greatest impact on all tenants’ sales is based on the property’s site and design, choosing the right mix of tenants, advertising, maintaining the common areas, and several other secondary factors. This arrangement, including a cancelation or minimum sales clause, forces stores to work together, or, in the parlance of shopping centers, to internalize inter-store externalities.

This is the fourth installment in The Shopping Mall Chronicles. Visit our blog to read the other articles in this series.