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The Role of Residual Claims and Self-Enforcement in Franchise Contracting

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  • Francine Lafontaine
  • Emmanuel Raynaud

Abstract

Much of the economic literature on franchising has been concerned with incentive issues and how these are managed in franchised contracts. Two main types of incentive mechanisms have been identified: residual claims and self enforcement. In this paper we describe these incentive mechanisms, and their use in franchise contracts. We argue that although these two types of mechanisms are usually thought of as alternative ways to align franchisee and franchisor incentives, they are in fact complementary in franchise contracts because they address different incentive problems. We explore what these incentive problems are, and then describe specifically how franchise contract terms and practices support each type of incentive mechanism. Finally, we discuss briefly, via two examples, how our analysis also applies to non-franchised systems with common marks or other reputation concerns.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8868.

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Date of creation: Mar 2002
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Handle: RePEc:nbr:nberwo:8868

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  13. Susan Athey & Scott Stern, 1998. "An Empirical Framework for Testing Theories About Complimentarity in Organizational Design," NBER Working Papers 6600, National Bureau of Economic Research, Inc.
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  18. Brickley, J.A. & Dark, F.H. & Weisbach, M.S., 1988. "The Economic Effects Of Franchise Termination Laws," Papers 88-11, Rochester, Business - Managerial Economics Research Center.
  19. Lafontaine, Francine & Slade, Margaret E., 1996. "Retail contracting and costly monitoring: Theory and evidence," European Economic Review, Elsevier, vol. 40(3-5), pages 923-932, April.
  20. Randall E. Westgren, 1999. "Delivering Food Safety, Food Quality, and Sustainable Production Practices: The Label Rouge Poultry System in France," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 81(5), pages 1107-1111.
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  24. Iain Cockburn & Rebecca Henderson & Scott Stern, 1999. "Balancing Incentives: The Tension Between Basic and Applied Research," NBER Working Papers 6882, National Bureau of Economic Research, Inc.
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Cited by:
  1. Sebastian Kranz & Shira B. Lewin-Solomons, 2008. "Decision Structures in Franchise Systems of the Plural Form," Bonn Econ Discussion Papers bgse8_2008, University of Bonn, Germany.
  2. John Benjamin & Peter Chinloy & Daniel Winkler, 2007. "Sorting, Franchising and Real Estate Brokerage Firms," The Journal of Real Estate Finance and Economics, Springer, vol. 34(2), pages 189-206, February.
  3. Clarissa Yeap, 2006. "Residual Claims and Incentives in Restaurant Chains," Working Papers 06-18, Center for Economic Studies, U.S. Census Bureau.
  4. González-Díaz, Manuel & Montoro-Sánchez, Ángeles, 2011. "Some lessons from incentive theory: Promoting quality in bus transport," Transport Policy, Elsevier, vol. 18(2), pages 299-306, March.

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