Incentive and Strategic Contracting: Implications for the Franchise Decision

We examine theoretical predictions and econometric evidence concerning franchise contracting and sales-force compensation and discuss a number of factors that ought to influence the contracts that are written between principals and agents. For each factor, we construct the simplest theoretical model that captures what we view as its essence. The comparative statics from the theoretical exercise are then used to organize our discussion of the empirical evidence, where the evidence is taken from published studies that have attempted to assess each factor’s effect on the power of agent incentives. We also discuss theoretical issues and empirical results pertaining to a few topics that have been addressed in the literature but that do not fit easily into our simple modeling framework. Finally, we discuss a few recent models with endogenous prices. Unfortunately, the evidence that relates to strategic or game-theoretic agency models is scanty. Nevertheless, we discuss the findings from the few relevant studies that we have been able to uncover.