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Incentive Conflicts and Contractual Restraints: Evidence from Franchising

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  • Brickley, James A
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    Abstract

    This study uses agency theory to develop testable implications about three provisions commonly observed in franchise contracts: (1) restrictions on passive ownership, (2) area development plans, and (3) mandatory advertising expenditures. The primary hypothesis is that these provisions are most likely when there are significant externalities among the units within the franchise system. The evidence, based on a large sample of franchise contracts, is generally consistent with this hypothesis. The evidence also suggests that these incentive instruments are complements. In contrast to the theory, most of the results do not support the hypothesis that the percentage of company-owned units is related to externalities within the system. Franchisee risk aversion and/or wealth constraints appear more important. While the study focuses on franchising, the results provide insights into related provisions in other contracts. Copyright 1999 by the University of Chicago.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Law & Economics.

    Volume (Year): 42 (1999)
    Issue (Month): 2 (October)
    Pages: 745-74

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    Handle: RePEc:ucp:jlawec:v:42:y:1999:i:2:p:745-74

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    Web page: http://www.journals.uchicago.edu/JLE/

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    Cited by:
    1. 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.
    2. Marco Furlotti, 2007. "There is more to contracts than incompleteness: a review and assessment of empirical research on inter-firm contract design," Journal of Management and Governance, Springer, vol. 11(1), pages 61-99, March.
    3. Ciccotello, Conrad S. & Muscarella, Chris J., 2001. "Contracts between managers and investors: a study of master limited partnership agreements," Journal of Corporate Finance, Elsevier, vol. 7(1), pages 1-23, March.
    4. Alvaro Cuervo-Cazurra, 2006. "Business groups and their types," Asia Pacific Journal of Management, Springer, vol. 23(4), pages 419-437, December.
    5. Francine Lafontaine & Kathryn L. Shaw, 2001. "Targeting Managerial Control: Evidence from Franchising," NBER Working Papers 8416, National Bureau of Economic Research, Inc.
    6. Magali Chaudey & Muriel Fadairo, 2009. "Double-Sided Externalities and Vertical Contracting : Evidence from European Franchising Data," Working Papers hal-00376243, HAL.
    7. Muriel Fadairo & Jianyu Yu, 2014. "Economic Rationales of Exclusive Dealing ; Empirical Evidence from the French Distribution Networks," Working Papers 1405, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
    8. Hideshi Itoh & Tatsuya Kikutani & Osamu Hayashida, 2008. "Complementarities among authority, accountability, and monitoring: Evidence from Japanese business groups," NBER Chapters, in: Organizational Innovation and Firm Performance, pages 207-228 National Bureau of Economic Research, Inc.
    9. Barthelemy, Jerome, 2004. "The administrative productivity of U.S. franchisors: an empirical investigation," Economics Letters, Elsevier, vol. 83(1), pages 115-121, April.
    10. Olivier Cochet & Thomas Ehrmann, 2007. "Preliminary evidence on the appointment of institutional solutions to franchisor moral hazard-the case of franchisee councils," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 41-55.
    11. Coles, Jeffrey L., 2008. "Disclosure policy: A discussion of Leuz, Triantis and Wang (2008) on "going dark"," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 209-220, August.
    12. Dunning, John H. & Pak, Yong Suhk & Beldona, Sam, 2007. "Foreign ownership strategies of UK and US international franchisors: An exploratory application of Dunning's envelope paradigm," International Business Review, Elsevier, vol. 16(5), pages 531-548, October.
    13. Etienne Pfister & Bruno Deffains & Myriam Doriat-Duban & Stéphane Saussier, 2006. "Institutions and contracts: Franchising," European Journal of Law and Economics, Springer, vol. 21(1), pages 53-78, January.
    14. 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.
    15. Bai, Chong-En & Xu, Lixin Colin, 2005. "Incentives for CEOs with multitasks: Evidence from Chinese state-owned enterprises," Journal of Comparative Economics, Elsevier, vol. 33(3), pages 517-539, September.
    16. Dnes, Antony & Garoupa, Nuno, 2005. "Externality and organizational choice in franchising," Journal of Economics and Business, Elsevier, vol. 57(2), pages 139-149.
    17. Feng, Li & Hendrikse, George W.J., 2008. "On the Nature of a Cooperative: A System of Attributes Perspective," 2008 International Congress, August 26-29, 2008, Ghent, Belgium 44398, European Association of Agricultural Economists.
    18. Dildar Hussain & Josef Windsperger, 2013. "A property rights view of multi-unit franchising," European Journal of Law and Economics, Springer, vol. 35(2), pages 169-185, April.
    19. Josef Windsperger, 2003. "Complementarities and Substitutabilities in Franchise Contracting: Some Results from the German Franchise Sector," Journal of Management and Governance, Springer, vol. 7(3), pages 291-313, September.
    20. Baranchuk, Nina & Kieschnick, Robert & Moussawi, Rabih, 2014. "Motivating innovation in newly public firms," Journal of Financial Economics, Elsevier, vol. 111(3), pages 578-588.
    21. repec:hal:wpaper:halshs-00624291 is not listed on IDEAS

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