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An Incomplete Contracting Model of Governance Structure Variety in Franchising

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Author Info
Hendrikse, G.W.J.
Jiang, T. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
Abstract

For the purpose of explaining governance structure variety in franchising, we explore the impact of governance structure on the incentives to invest in specific assets for the franchisor as well as the distributors. Wholly-owned, wholly-franchised, and mixed (dual distribution) franchise systems are considered. Circumstances are identified when a dual distribution governance structure uniquely allocates efficient ownership over assets. Whether dual distribution benefits are realized in a franchise or a cooperative franchise depends on whether most value is added upstream or downstream. A disadvantage of a dual distribution system is the deterioration of the investment incentives of the party having no authority, i.e. either the company-owned outlet manager in a traditional franchise or the franchisor in a cooperative franchise. A wholly-franchised system may therefore be efficient even when unique dual distribution benefits are present. A necessary condition for the efficiency of a dual distribution governance structure is a positive systemic effect, not the value of the brand name or location (or other) differences between outlets.

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Publisher Info
Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2007-049-ORG Revision_Date: 2009-07-29.

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Date of creation: 21 Aug 2007
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Handle: RePEc:dgr:eureri:300011723

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Related research
Keywords: Franchising; Dual distribution; Governance; Incomplete contracting;

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References listed on IDEAS
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