The Use of Up-front Fees, Royalties and Franchisor Sales to Franchisees in Business Format Franchising
This article provides evidence on the determinants of compensation provisions included in franchise contracts. The results support for both the optimal allocation of risk and double-sided moral hazard explanations for franchise contracts. The results also reveal that the value of both the initial and ongoing services provided by franchisors to franchisees strongly affects the compensation arrangements, which implies that a capital goal of these arrangements is to recover the costs of the services offered by franchisors.
KeywordsMoral Hazard Business Format Retail Sector Continuous Service Royalty Rate
Unable to display preview. Download preview PDF.
- 2.Arrunada B, Garicano L, Vázquez L. Contractual Allocation of Decision Rights and Incentives: The Case of Automobile Distribution. Journal of Law, Economics, and Organization 17: 256–283Google Scholar
- 3.Athey S, Stern S (1998) An Empirical Framework for Testing Theories about Complementarity in Organizational Design. Working paper. National Bureau of Economic Research, 1998Google Scholar
- 4.Bercovitz JEL (2000) An Analysis of the Contract Provisions in Business-Format Franchise Agreements. Working paper, Duke University, 2000Google Scholar
- 9.Dnes AW (1992) Unfair’ Contractual Practices and Hostages in Franchise Contracts. Journal of Institutional and Theoretical Economics 148: 484–504Google Scholar
- 10.Ichiniowski C, Shaw K, Prennushi G (1997) The Effects of Human Resource Management Practices on Productivity. American Economic Review 87: 291–313Google Scholar
- 14.Lafontaine F, Slade ME (2001) Incentive Contracting and the Franchise Decision. In Advances in Business Applications of Game Theory. Edited by K Chatterjee, W Samuelson. Dordrecht: Kluwer Academic Press, 2001Google Scholar
- 16.Martin RE (1988) Franchising and Risk Management. American Economic Review 78: 954–968Google Scholar
- 23.Stern LW, El-Ansary AI (1988) Marketing Channels. Englewood Cliffs, NJ: Prentice-HallGoogle Scholar