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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.

Suggested Citation

  • 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.
  • Handle: RePEc:nbr:nberwo:8868
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    References listed on IDEAS

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    Cited by:

    1. Peter Cappelli & Monika Hamori, 2008. "Are Franchises Bad Employers?," ILR Review, Cornell University, ILR School, vol. 61(2), pages 147-162, January.
    2. 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.
    3. López-Fernández, Begoña & López-Bayón, Susana, 2011. "Economic rents in franchising: Do they exist?," Economics Letters, Elsevier, vol. 113(2), pages 195-198.
    4. Jean Beuve & Stéphane Saussier, 2012. "Interfirm cooperation in strategic relationships: the role of formal contract," Industrial and Corporate Change, Oxford University Press and the Associazione ICC, vol. 21(4), pages 811-836, August.
    5. Kranz, Sebastian & Lewin-Solomons, Shira B., 2008. "Decision Structures in Franchise Systems of the Plural Form," Bonn Econ Discussion Papers 8/2008, University of Bonn, Bonn Graduate School of Economics (BGSE).
    6. Clarissa Yeap, 2006. "Residual Claims and Incentives in Restaurant Chains," Working Papers 06-18, Center for Economic Studies, U.S. Census Bureau.
    7. 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.

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    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • D2 - Microeconomics - - Production and Organizations

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