IDEAS home Printed from https://ideas.repec.org/a/oup/ecinqu/v35y1997i3p544-54.html
   My bibliography  Save this article

Moral Hazard, Asset Specificity, Implicit Bonding, and Compensation: The Case of Franchising

Author

Listed:
  • Wimmer, Bradley S
  • Garen, John E

Abstract

In franchising, many of the elements of moral hazard models merge. Issues of two-sided moral hazard, bonding, and asset specificity all play a role. The authors extend the literature by considering how asset specificity creates an implicit bond and affects incentive pay. This approach implies that, if one party posts a larger bond, this improves their incentives and allows enhancement of the other party's incentives through a larger residual income claim. The authors' empirical work supports this approach. For example, reductions in the specificity of the franchisee's investment due to leasing lowers the royalty rate and raises the franchise fee. Copyright 1997 by Oxford University Press.

Suggested Citation

  • Wimmer, Bradley S & Garen, John E, 1997. "Moral Hazard, Asset Specificity, Implicit Bonding, and Compensation: The Case of Franchising," Economic Inquiry, Western Economic Association International, vol. 35(3), pages 544-554, July.
    • Handle: RePEc:oup:ecinqu:v:35:y:1997:i:3:p:544-54
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Richard S. Brown, 2017. "Franchisor market power and control rights in franchise systems: the case of Major League Baseball versus the Los Angeles Dodgers," Service Business, Springer;Pan-Pacific Business Association, vol. 11(1), pages 1-21, March.
    2. Windsperger, Josef, 2001. "The fee structure in franchising: a property rights view," Economics Letters, Elsevier, vol. 73(2), pages 219-226, November.
    3. Dur, Robert & Non, Arjan & Roelfsema, Hein, 2010. "Reciprocity and incentive pay in the workplace," Journal of Economic Psychology, Elsevier, vol. 31(4), pages 676-686, August.
    4. George Hendrikse & Patrick Hippmann & Josef Windsperger, 2015. "Trust, transaction costs and contractual incompleteness in franchising," Small Business Economics, Springer, vol. 44(4), pages 867-888, April.
    5. Francine Lafontaine & Margaret E. Slade, 1998. "Incentive Contracting and the Franchise Decision," NBER Working Papers 6544, National Bureau of Economic Research, Inc.
    6. Navarro Sanfelix, Guillermo & Puig, Francisco, 2017. "New challenges in franchisor-franchisee relationship. An analysis from agency theory perspective," Cuadernos de Gestión, Universidad del País Vasco - Instituto de Economía Aplicada a la Empresa (IEAE).
    7. Pankaj C. Patel & John A. Pearce II, 2020. "Franchisees and Loan Default on Third-Party Guarantee Loans: Evidence From the United States," Entrepreneurship Theory and Practice, , vol. 44(5), pages 861-877, September.
    8. Michael H. Dickey & Blake Ives, 2000. "The Impact of Intranet Technology on Power in Franchisee/Franchisor Relationships," Information Systems Frontiers, Springer, vol. 2(1), pages 99-114, January.
    9. Matej Lahovnik Edith Bečić Steiner, 2019. "Organization in New Business Environment: a Franchisor’s View," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 22(SCI), pages 83-94, March.
    10. Josef Windsperger, 2013. "The governance of franchising networks," Chapters, in: Anna Grandori (ed.), Handbook of Economic Organization, chapter 27, Edward Elgar Publishing.
    11. Affuso, L., 2000. "Intra-Firm Retail Contracting: Survey Evidence from the UK'," Cambridge Working Papers in Economics 0022, Faculty of Economics, University of Cambridge.
    12. Masayoshi Maruyama & Yu Yamashita, 2012. "Franchise Fees and Royalties: Theory and Empirical Results," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 40(3), pages 167-189, May.
    13. Josef Windsperger, 2003. "Complementarities and Substitutabilities in Franchise Contracting: Some Results from the German Franchise Sector," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 7(3), pages 291-313, September.
    14. Eugênio José Silva Bitti & Cintya Lanchimba & Muriel Fadairo, 2017. "Franchisors'choice between royalties and fixed fees evidence from Brazil," Working Papers 1731, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    15. John Garen, 2020. "The Allocation and Exchange of Property Rights as a Way to Understand Comparative Economic Systems and Managerial Economics," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 35(Winter 20), pages 43-59.
    16. Eugênio José Silva Bitti & Cintya Lanchimba & Muriel Fadairo, 2017. "Franchisors' choice between royalties and fixed fees evidence from Brazil," Working Papers halshs-01618054, HAL.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:ecinqu:v:35:y:1997:i:3:p:544-54. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/weaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.