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Targeting Managerial Control: Evidence from Franchising

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  • Francine Lafontaine

    ()
    (University of Michigan)

  • Kathryn L. Shaw

    ()
    (Stanford University, NBER)

Abstract

Franchisors simultaneously operate outlets under two distinct incentive schemes: franchising and company ownership. Using an extensive panel dataset, we show that experienced franchisors maintain a stable level of corporate ownership over time. However, the targeted rate of company ownership varies considerably across firms. We show that franchisors with high brand name value, measured by major media expenditures and other proxies, have high rates of company ownership. We argue that franchisors with valuable brands have high rates of company ownership so they have incentives to exert more control and they can better protect their brands from franchisee free-riding.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 36 (2005)
Issue (Month): 1 (Spring)
Pages: 131-150

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Handle: RePEc:rje:randje:v:36:y:2005:1:p:131-150

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Keywords: Transactional Relationships; Contracts and Reputation; Networks Brand; Firm; Firms; Franchising;

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References

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  1. Gallini, Nancy T & Lutz, Nancy A, 1992. "Dual Distribution and Royalty Fees in Franchising," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 8(3), pages 471-501, October.
  2. Kaufmann, Patrick J & Lafontaine, Francine, 1994. "Costs of Control: The," Journal of Law and Economics, University of Chicago Press, University of Chicago Press, vol. 37(2), pages 417-53, October.
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  4. Lafontaine, Francine & Shaw, Kathryn L., 1998. "Franchising growth and franchisor entry and exit in the U.S. market: Myth and reality," Journal of Business Venturing, Elsevier, vol. 13(2), pages 95-112, March.
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