The Effect of a Technology Shock on Contract Form: Revenue-sharing in Movie Exhibition and the Coming of Sound

During the silent era, movie producers rented the vast majority of their films to exhibitors for flat per-day fees, but a technology “shock” in the form of the coming of sound led to the widespread replacement of flat fees by revenuesharing. This paper seeks to determine why. It finds that sound technology altered the structure of incentives in movie exhibition, reducing the role of the exhibitor (which decreased concern about exhibitor shirking), reducing the cost of dividing attendance revenue ex post (necessary for revenue-sharing), and increasing the uncertainty over film values (at least initially), thus raising the cost of negotiating a mutually acceptable (to producer and exhibitor) lump sum payment. These findings allow additional light to be shed on the reasons for share contracts in general—most previous studies have been limited to an examination a cross-section of contracts.