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Financial Constraints and Moral Hazard: The Case of Franchising

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  • Kühn, Kai-Uwe
  • Lafontaine, Francine
  • Fan, Ying

Abstract

Financial 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.

Suggested Citation

  • Kühn, Kai-Uwe & Lafontaine, Francine & Fan, Ying, 2013. "Financial Constraints and Moral Hazard: The Case of Franchising," CEPR Discussion Papers 9728, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9728
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    Cited by:

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    6. Rüdiger Bachmann & Sebastian K. Rüth, 2020. "Systematic Monetary Policy And The Macroeconomic Effects Of Shifts In Residential Loan‐To‐Value Ratios," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(2), pages 503-530, May.
    7. Chen Jiawei & Sacks Michael, 2018. "Going Along or Going Independent? A Dynamic Analysis of Nonprofit Alliances," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 18(2), pages 1-20, April.
    8. Sertsios, Giorgo, 2020. "Corporate finance, industrial organization, and organizational economics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    9. Lømo, Teis Lunde, 2020. "Vertical control, opportunism, and risk sharing," Economics Letters, Elsevier, vol. 191(C).
    10. Renáta Kosová & Giorgo Sertsios, 2018. "An Empirical Analysis of Self-Enforcement Mechanisms: Evidence from Hotel Franchising," Management Science, INFORMS, vol. 64(1), pages 43-63, January.

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    More about this item

    Keywords

    Collateralizable housing wealth; Contracting; Empirical; Entry; Financial constraints; Growth; Incentives; Principal-agent;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • 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
    • L8 - Industrial Organization - - Industry Studies: Services

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