Financial Constraints and Moral Hazard: The Case of Franchising
AbstractFinancial constraints are an important impediment to the growth of small businesses. We study theoretically and empirically how the financial constraints of agents affect their decisions to exert effort, and, hence the organizational decisions and growth of principals, in the context of franchising. We find that a 30 percent decrease in average collateralizable housing wealth in a region delays chains’ entry into franchising by 0.28 years on average, 9 percent of the average waiting time, and slows their growth by around 10 percent, leading to a 10 percent reduction in franchised chain employment.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 4474.
Date of creation: 2013
Date of revision:
contracting; incentives; principal-agent; empirical; collateralizable housing wealth; entry; growth;
Other versions of this item:
- Fan, Ying & Kühn, Kai-Uwe & Lafontaine, Francine, 2013. "Financial constraints and moral hazard: The case of franchising," DICE Discussion Papers 114, Heinrich‐Heine‐Universität Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
- L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
- L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
- D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- L80 - Industrial Organization - - Industry Studies: Services - - - General
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