Moral Hazard, Asset Specificity, Implicit Bonding, and Compensation: The Case of Franchising
AbstractIn franchising, many of the elements of moral hazard models merge. Issues of two-sided moral hazard, bonding, and asset specificity all play a role. The authors extend the literature by considering how asset specificity creates an implicit bond and affects incentive pay. This approach implies that, if one party posts a larger bond, this improves their incentives and allows enhancement of the other party's incentives through a larger residual income claim. The authors' empirical work supports this approach. For example, reductions in the specificity of the franchisee's investment due to leasing lowers the royalty rate and raises the franchise fee. Copyright 1997 by Oxford University Press.
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Bibliographic InfoArticle provided by Western Economic Association International in its journal Economic Inquiry.
Volume (Year): 35 (1997)
Issue (Month): 3 (July)
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- Robert Dur & Arjan Non & Hein Roelfsema, 2008.
"Reciprocity and Incentive Pay in the Workplace,"
Tinbergen Institute Discussion Papers
08-080/1, Tinbergen Institute.
- Robert Dur & Arjan Non & Hein Roelfsema, 2009. "Reciprocity and Incentive Pay in the Workplace," SOEPpapers on Multidisciplinary Panel Data Research 177, DIW Berlin, The German Socio-Economic Panel (SOEP).
- Dur, Robert & Non, Arjan & Roelfsema, Hein, 2010. "Reciprocity and Incentive Pay in the Workplace," IZA Discussion Papers 4782, Institute for the Study of Labor (IZA).
- Windsperger, Josef, 2001. "The fee structure in franchising: a property rights view," Economics Letters, Elsevier, vol. 73(2), pages 219-226, November.
- Affuso, L., 2000. "Intra-Firm Retail Contracting: Survey Evidence from the UK'," Cambridge Working Papers in Economics 0022, Faculty of Economics, University of Cambridge.
- 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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