Rents for stores at shopping malls are usually tied to the profits of the store. Comment on how this arrangement affects the mall owner's income versus a fixed rent

Question

What will be an ideal response?

Answer 1

It is likely that such an arrangement reduces the mall owner's income. When paying a fixed rent, the store operates efficiently. When having to share the profit with the mall owner, the store owner has a reduced marginal benefit without a reduction in her marginal cost. With downward sloping benefits, the store owner will maximize their profit by selling less. A fixed rent will incentivize the store owner to maximize store profits, and the owner can capture total profits through the rent. Additionally, when having to share the profit, the store owner has the incentive to lie about the store's profit. From the mall owner's perspective, a profit-sharing contract gives her the incentive to make expenditures (maintenance) that increase the number of mall customers and, possibly, the store's profit.