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Financial Constraints and Franchising Decisions

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  • Kai-Uwe Kuhn

    (University of Michigan)

  • Francine Lafontaine

    (University of Michigan)

  • Ying Fan

    (University of Michigan)

Abstract

We study how the financial constraints of agents affect the behavior of principals in the context of franchising. We develop an empirical model of franchising starting with a principal-agent framework that emphasizes the role of franchisees' collateral from an incentive perspective. We estimate the determinants of chains' entry (into franchising) and growth decisions using data on franchised chains and data on local macroeconomic conditions. In particular, we use collateralizable housing wealth at the state level as an inverse measure of the average financial constraints of potential franchisees. We find that a decrease in collateralizable housing wealth in the local economy leads to both later entry into franchising by local franchisors, and slower growth in the number of franchised -- and total -- outlets in these chains. We show that the corresponding job losses can be substantial.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 933.

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Date of creation: 2013
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Handle: RePEc:red:sed013:933

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  1. Bonnet, Céline & Dubois, Pierre, 2009. "Inference on Vertical Contracts between Manufacturers and Retailers Allowing for Nonlinear Pricing and Resale Price Maintenance," IDEI Working Papers 583, Institut d'Économie Industrielle (IDEI), Toulouse.
  2. Gian Luca Clementi & Hugo Hopenhagn, 2004. "A Theory of Financing Constraints and Firm Dynamics," Working Papers 04-25, New York University, Leonard N. Stern School of Business, Department of Economics.
  3. Ackerberg, D.A. & Botticini, M., 1999. "Endogenous Matching and the Empirical Determinants of Contract Form," Papers 96, Boston University - Department of Economics.
  4. Liran Einav & Mark Jenkins & Jonathan Levin, 2012. "Contract Pricing in Consumer Credit Markets," Econometrica, Econometric Society, vol. 80(4), pages 1387-1432, 07.
  5. Gauti B. Eggertsson & Paul Krugman, 2012. "Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 127(3), pages 1469-1513.
  6. Villas-Boas, Sofia B., 2007. "Vertical relationships between manufacturers and retailers: inference with limited data," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt6gz1t778, Department of Agricultural & Resource Economics, UC Berkeley.
  7. Francine Lafontaine & Kathryn L. Shaw, 2001. "Targeting Managerial Control: Evidence from Franchising," NBER Working Papers 8416, National Bureau of Economic Research, Inc.
  8. Gregory S. Crawford & Ali Yurukoglu, 2012. "The Welfare Effects of Bundling in Multichannel Television Markets," American Economic Review, American Economic Association, vol. 102(2), pages 643-85, April.
  9. Julie H. Mortimer, 2008. "Vertical Contracts in the Video Rental Industry -super-1," Review of Economic Studies, Oxford University Press, vol. 75(1), pages 165-199.
  10. Katherine Ho & Justin Ho & Julie Holland Mortimer, 2012. "The Use of Full-Line Forcing Contracts in the Video Rental Industry," American Economic Review, American Economic Association, vol. 102(2), pages 686-719, April.
  11. 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.
  12. Pierre Dubois, 1999. "Moral Hazard, Land Fertility and Sharecropping in a Rural Area of the Philippines," Working Papers 99-30, Centre de Recherche en Economie et Statistique.
  13. Laffont, Jean-Jacques & Matoussi, Mohamed Salah., 1988. "Moral Hazard, Financial Constraints and Sharecropping in El Oulja," Working Papers 667, California Institute of Technology, Division of the Humanities and Social Sciences.
  14. Ronald Jarmin & Shawn Klimek & Javier Miranda, 2005. "The Role of Retail Chains: National, Regional, and Industry Results," Working Papers 05-30, Center for Economic Studies, U.S. Census Bureau.
  15. Ricard Gil & Francine Lafontaine, 2012. "Using Revenue Sharing to Implement Flexible Prices: Evidence from Movie Exhibition Contracts," Journal of Industrial Economics, Wiley Blackwell, vol. 60(2), pages 187-219, 06.
  16. Francine Lafontaine & Margaret Slade, 2007. "Vertical Integration and Firm Boundaries: The Evidence," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 629-685, September.
  17. Francine Lafontaine, 1992. "Agency Theory and Franchising: Some Empirical Results," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 263-283, Summer.
  18. Gonzalez-Diaz, Manuel & Solis-Rodriguez, Vanesa, 2012. "Why do entrepreneurs use franchising as a financial tool? An agency explanation," Journal of Business Venturing, Elsevier, vol. 27(3), pages 325-341.
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