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Up-front Franchise Fees and Ongoing Variable Payments as Substitutes: An Agency Perspective

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  • Luis Vázquez

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    Abstract

    This article provides evidence on the determinants of the compensation arrangements used in franchise relationships. While the empirical literature has studied two of these compensation arrangements – the royalty rate and the up-front franchise fee – this work expands the analysis to another important source of revenues for franchisors: the sales of inputs to franchisees at prices greater than marginal costs. Consistent with predictions suggested by agency theory, the compensation arrangements studied appear to function as substitutes. The results also reveal that the value of the services provided by franchisors to franchisees strongly affects the compensation arrangements studied, so a capital goal of these arrangements is to recover the costs of the services offered by franchisors. Copyright Springer 2005

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    File URL: http://hdl.handle.net/10.1007/s11151-005-0983-z
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    Bibliographic Info

    Article provided by Springer in its journal Review of Industrial Organization.

    Volume (Year): 26 (2005)
    Issue (Month): 4 (06)
    Pages: 445-460

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    Handle: RePEc:kap:revind:v:26:y:2005:i:4:p:445-460

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    Web page: http://www.springerlink.com/link.asp?id=100336

    Related research

    Keywords: Agency theory; contract; franchising; ongoing variable payment; royalty rate; up-front fee;

    References

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    1. Susan Athey & Scott Stern, 1998. "An Empirical Framework for Testing Theories About Complimentarity in Organizational Design," NBER Working Papers 6600, National Bureau of Economic Research, Inc.
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    Cited by:
    1. Maruyama, Masayoshi & Yamashita, Yu, 2010. "The logic of franchise contracts: Empirical results of Japan," Japan and the World Economy, Elsevier, vol. 22(3), pages 183-192, August.
    2. Cintya Lanchimba, 2013. "Optimal Monetary Provisions in Plural Form Franchise Systems ; A Theoretical Model of Incentives with Two Risk-Averse Agents," Working Papers 1321, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
    3. Ivan Kotliarov, 2011. "Royalty Rate Structure in Case of Franchising," Annals of Economics and Finance, Society for AEF, vol. 12(1), pages 139-156, May.
    4. Muriel Fadairo & Cintya Lanchimba Lopez, 2012. "Performance in distribution systems : What is the influence of the upstream firm’s organizational choices ?," Working Papers 1224, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
    5. Muriel Fadairo & Cintya Lanchimba, 2012. "Performance in distribution systems : What is the influence of the upstream firm's organizational choices ?," Working Papers halshs-00727382, HAL.
    6. Cintya Lanchimba, 2013. "Optimal Monetary Provisions in Plural Form Franchise Systems; A Theoretical Model of Incentives with Two Risk-Averse Agents," Working Papers halshs-00830899, HAL.
    7. Masayoshi Maruyama & Yu Yamashita, 2012. "Franchise Fees and Royalties: Theory and Empirical Results," Review of Industrial Organization, Springer, vol. 40(3), pages 167-189, May.

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