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

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Author Info
Francine Lafontaine
Emmanuel Raynaud

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

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Klein, Benjamin & Saft, Lester F, 1985. "The Law and Economics of Franchise Tying Contracts," Journal of Law & Economics, University of Chicago Press, vol. 28(2), pages 345-61, May.
  2. Klein, Benjamin, 1980. "Transaction Cost Determinants of "Unfair" Contractual Arrangements," American Economic Review, American Economic Association, vol. 70(2), pages 356-62, May. [Downloadable!] (restricted)
  3. 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. [Downloadable!] (restricted)
  4. 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. [Downloadable!] (restricted)
  5. Blair, Roger D. & Herndon, Jill Boylston, 1999. "The misapplication of Kodak In franchise tying suits," Journal of Business Venturing, Elsevier, vol. 14(4), pages 397-415, July. [Downloadable!] (restricted)
  6. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June. [Downloadable!] (restricted)
  7. Stiglitz, Joseph E, 1974. "Incentives and Risk Sharing in Sharecropping," Review of Economic Studies, Blackwell Publishing, vol. 41(2), pages 219-55, April. [Downloadable!] (restricted)
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  8. Michael, Steven C. & Moore, Hollie J., 1995. "Returns to franchising," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 133-155, October. [Downloadable!] (restricted)
  9. Mathewson, G Frank & Winter, Ralph A, 1985. "The Economics of Franchise Contracts," Journal of Law & Economics, University of Chicago Press, vol. 28(3), pages 503-26, October.
  10. Barron, John M & Umbeck, John R, 1984. "The Effects of Different Contractual Arrangements: The Case of Retail Gasoline Markets," Journal of Law & Economics, University of Chicago Press, vol. 27(2), pages 313-28, October.
  11. Francine Lafontaine & Kathryn L. Shaw, 2001. "Targeting Managerial Control: Evidence from Franchising," NBER Working Papers 8416, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Brickley, James A & Dark, Frederick H & Weisbach, Michael S, 1991. "The Economic Effects of Franchise Termination Laws," Journal of Law & Economics, University of Chicago Press, vol. 34(1), pages 101-32, April.
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  13. Lafontaine, Francine & Bhattacharyya, Sugato, 1995. "The role of risk in franchising," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 39-74, October. [Downloadable!] (restricted)
  14. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-91, September. [Downloadable!] (restricted)
  15. Klein, Benjamin, 1995. "The economics of franchise contracts," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 9-37, October. [Downloadable!] (restricted)
  16. Arturs Kalnins & Francine Lafontaine, 2004. "Multi-unit Ownership in Franchising: Evidence from the Fast-Food Industry in Texas," RAND Journal of Economics, The RAND Corporation, vol. 35(4), pages 747-761, Winter.
  17. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August. [Downloadable!] (restricted)
  18. Francine Lafontaine & Margaret E. Slade, 1998. "Incentive Contracting and the Franchise Decision," NBER Working Papers 6544, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  19. Rubin, Paul H, 1978. "The Theory of the Firm and the Structure of the Franchise Contract," Journal of Law & Economics, University of Chicago Press, vol. 21(1), pages 223-33, April.
  20. Eswaran, Mukesh & Kotwal, Ashok, 1985. "A Theory of Contractual Structure in Agriculture," American Economic Review, American Economic Association, vol. 75(3), pages 352-67, June. [Downloadable!] (restricted)
  21. Kaufmann, Patrick J & Lafontaine, Francine, 1994. "Costs of Control: The," Journal of Law & Economics, University of Chicago Press, vol. 37(2), pages 417-53, October.
  22. Francine Lafontaine, 1992. "Agency Theory and Franchising: Some Empirical Results," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 263-283, Summer. [Downloadable!] (restricted)
  23. Lutz, Nancy A., 1995. "Ownership rights and incentives in franchising," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 103-131, October. [Downloadable!] (restricted)
  24. 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. [Downloadable!] (restricted)
  25. 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. [Downloadable!] (restricted)
  26. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Clarissa Yeap, 2006. "Residual Claims and Incentives in Restaurant Chains," Working Papers 06-18, Center for Economic Studies, U.S. Census Bureau. [Downloadable!]
  2. Sebastian Kranz & Shira B. Lewin-Solomons, . "Decision Structures in Franchise Systems of the Plural Form," Bonn Econ Discussion Papers bgse8_2008, University of Bonn, Germany. [Downloadable!]
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