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Non-contractibility and Market Uncertainty in Franchise Systems

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  • Hidetoshi Shiroishi

    (Keio University)

  • Tomokazu Kubo

    (Chuo University)

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    Abstract

    Franchisors face a tradeoff between centralization of decision rights and decentralization of decision rights. Regarding the problem, we developed a causal model considering that the relationship between non-contractibility of assets and the allocation of decision rights is not constant, but is contingent on market uncertainty. The results of the analysis showed that a franchise system would be centralized when (1) the franchisor's assets are intangible and are impossible to be transferred by contract, (2) the franchisees' assets are less intangible and are possible to be transferred by contract, and/or (3) the market is uncertain.

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    File URL: http://ies.keio.ac.jp/old_project/old/gcoe-econbus/pdf/dp/DP2012-023.pdf
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    Bibliographic Info

    Paper provided by Keio/Kyoto Joint Global COE Program in its series Keio/Kyoto Joint Global COE Discussion Paper Series with number 2012-023.

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    Length: 17 pages
    Date of creation: Dec 2012
    Date of revision:
    Handle: RePEc:kei:dpaper:2012-023

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    1. Sugato Bhattacharyya & Francine Lafontaine, 1995. "Double-Sided Moral Hazard and the Nature of Share Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 761-781, Winter.
    2. Oliver Hart & Sanford Grossman, 1985. "The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration," Working papers 372, Massachusetts Institute of Technology (MIT), Department of Economics.
    3. Blair,Roger D. & Lafontaine,Francine, 2005. "The Economics of Franchising," Cambridge Books, Cambridge University Press, number 9780521772525, October.
    4. Oliver Hart & John Moore, 1988. "Property Rights and the Nature of the Firm," Working papers 495, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Brickley, James A. & Dark, Frederick H., 1987. "The choice of organizational form The case of franchising," Journal of Financial Economics, Elsevier, vol. 18(2), pages 401-420, June.
    6. Francine Lafontaine, 1992. "Agency Theory and Franchising: Some Empirical Results," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 263-283, Summer.
    7. Luis Vázquez, 2005. "Up-front Franchise Fees and Ongoing Variable Payments as Substitutes: An Agency Perspective," Review of Industrial Organization, Springer, vol. 26(4), pages 445-460, 06.
    8. Rajiv Lal, 1990. "Improving Channel Coordination Through Franchising," Marketing Science, INFORMS, vol. 9(4), pages 299-318.
    9. Windsperger, Josef, 2004. "Centralization of franchising networks: evidence from the Austrian franchise sector," Journal of Business Research, Elsevier, vol. 57(12), pages 1361-1369, December.
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