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Targeting Managerial Control: Evidence from Franchising

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  • Francine Lafontaine
  • Kathryn L. Shaw

Abstract

Using an extensive longitudinal data set on franchising firms, we show that established franchisors manage their portfolio of company and franchised units to maintain a particular target level of corporate control and ownership of outlets. On average, established franchisors maintain about 15 percent of their outlets as company owned - with the other 85 percent owned by franchisees. Interestingly, the rate of company ownership does not rise or fall within firms as they gain experience or learn, or as they succeed or fail. However, the targeted rate does vary considerably across firms: firm-specific fixed effects explain 90 percent of the variance of company ownership rates in our longitudinal data. Given strong evidence that firms target specific, but different, rates of company ownership, what factors determine firms' optimal targeted rates? We find that brandname value is an important determinant: franchisors with high brandname value, as measured by advertising fees or major media expenditures, target high rates of company ownership. We argue that targeting high rates of company ownership is desirable in chains with more valuable brands because individual franchisees have incentives to free ride on brandname value. Consequently, high-value franchisors need to exert more direct managerial control over outlets in their chain. In addition, high company ownership rates give franchisors better incentives to maintain the value of their brand.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8416.

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Date of creation: Aug 2001
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Publication status: published as Lafontaine, Francine and Kathryn L. Shaw. "Targeting Managerial Control: Evidence From Franchising," Rand Journal of Economics, 2005, v36(1,Spring), 131-150.
Handle: RePEc:nbr:nberwo:8416

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Cited by:
  1. Lamar Pierce & Michael W. Toffel, 2010. "The Role of Organizational Scope and Governance in Strengthening Private Monitoring," Harvard Business School Working Papers 11-004, Harvard Business School, revised Feb 2012.
  2. Hendrikse, G.W.J. & Jiang, T., 2007. "An Incomplete Contracting Model of Governance Structure Variety in Franchising," ERIM Report Series Research in Management ERS-2007-049-ORG, 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 Uni.
  3. Magali Chaudey & Muriel Fadairo & Gwennaël Solard, 2011. "Sector-based explanation of vertical integration in distribution systems; Evidence from France," Working Papers 1136, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  4. Chen, Jean Jinghan & Dimou, Irini, 2005. "Expansion strategy of international hotel firms," Journal of Business Research, Elsevier, vol. 58(12), pages 1730-1740, December.
  5. Timothy Bresnahan & Jonathan Levin, 2012. "Vertical Integration and Market Structure," Discussion Papers 11-010, Stanford Institute for Economic Policy Research.
  6. Paul Amadieu & Karine Picot-Coupey & Jean-Laurent Viviani, 2013. "Organizational choices and financial performance: the case of company-owned stores, franchisee-owned stores and stores-within-a-store among French fashion retailers," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201335, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  7. Magali Chaudey & Muriel Fadairo & Gwennaël Solard, 2011. "Sector-based explanation of vertical integration in distribution systems; Evidence from France," Working Papers halshs-00654848, HAL.
  8. Tianxi Wang, 2009. "Ownership, Control, and Incentive," Economics Discussion Papers 676, University of Essex, Department of Economics.
  9. Antonio Nicita & Simone Sepe, 2012. "The Hold-up Problem Under Common Agency," Department of Economics University of Siena 636, Department of Economics, University of Siena.
  10. Shaw, Kathryn, 2009. "Insider econometrics: A roadmap with stops along the way," Labour Economics, Elsevier, vol. 16(6), pages 607-617, December.
  11. Francine Lafontaine & Emmanuel Raynaud, 2002. "The Role of Residual Claims and Self-Enforcement in Franchise Contracting," NBER Working Papers 8868, National Bureau of Economic Research, Inc.
  12. Kai-Uwe Kuhn & Francine Lafontaine & Ying Fan, 2013. "Financial Constraints and Franchising Decisions," 2013 Meeting Papers 933, Society for Economic Dynamics.
  13. 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.
  14. Giorgio Zanarone, 2012. "Coase (1937) revisited: Endogenous fiat in firms and markets," International Review of Economics, Springer, vol. 59(2), pages 201-221, July.
  15. 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).
  16. Muriel Fadairo & Cintya Lanchimba Lopez, 2012. "Performance in distribution systems : What is the influence of the upstream firm’s organizational choices ?," Working Papers 1224, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
  17. Hendrikse, G.W.J. & Jiang, T., 2005. "Plural Form in Franchising: An Incomplete Contracting Approach," ERIM Report Series Research in Management ERS-2005-090-ORG, 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 Uni.
  18. Casey Ichniowski & Kathryn L. Shaw, 2009. "Insider Econometrics: Empirical Studies of How Management Matters," NBER Working Papers 15618, National Bureau of Economic Research, Inc.
  19. Philippe Cyrenne, 2011. "Dual Distribution and Differentiated Products," Departmental Working Papers 2011-04, The University of Winnipeg, Department of Economics.

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