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Targeting Managerial Control: Evidence from Franchising

  • Francine Lafontaine

    ()

    (University of Michigan)

  • Kathryn L. Shaw

    ()

    (Stanford University, NBER)

Franchisors simultaneously operate outlets under two distinct incentive schemes: franchising and company ownership. Using an extensive panel dataset, we show that experienced franchisors maintain a stable level of corporate ownership over time. However, the targeted rate of company ownership varies considerably across firms. We show that franchisors with high brand name value, measured by major media expenditures and other proxies, have high rates of company ownership. We argue that franchisors with valuable brands have high rates of company ownership so they have incentives to exert more control and they can better protect their brands from franchisee free-riding.

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Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 36 (2005)
Issue (Month): 1 (Spring)
Pages: 131-150

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Handle: RePEc:rje:randje:v:36:y:2005:1:p:131-150
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  1. Lafontaine, Francine & Shaw, Kathryn L., 1998. "Franchising growth and franchisor entry and exit in the U.S. market: Myth and reality," Journal of Business Venturing, Elsevier, vol. 13(2), pages 95-112, March.
  2. Lafontaine, Francine & Slade, Margaret E, 1997. "Retail Contracting: Theory and Practice," Journal of Industrial Economics, Wiley Blackwell, vol. 45(1), pages 1-25, March.
  3. Brickley, James A, 1999. "Incentive Conflicts and Contractual Restraints: Evidence from Franchising," Journal of Law and Economics, University of Chicago Press, vol. 42(2), pages 745-74, October.
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  6. 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.
  7. Francine Lafontaine, 1992. "Agency Theory and Franchising: Some Empirical Results," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 263-283, Summer.
  8. 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.
  9. Carmichael, H Lorne, 1983. "The Agent-Agents Problem: Payment by Relative Output," Journal of Labor Economics, University of Chicago Press, vol. 1(1), pages 50-65, January.
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  11. Rubin, Paul H, 1978. "The Theory of the Firm and the Structure of the Franchise Contract," Journal of Law and Economics, University of Chicago Press, vol. 21(1), pages 223-33, April.
  12. Gallini, Nancy T & Lutz, Nancy A, 1992. "Dual Distribution and Royalty Fees in Franchising," Journal of Law, Economics and Organization, Oxford University Press, vol. 8(3), pages 471-501, October.
  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.
  14. Andrea Shepard, 1993. "Contractual Form, Retail Price, and Asset Characteristics in Gasoline Retailing," RAND Journal of Economics, The RAND Corporation, vol. 24(1), pages 58-77, Spring.
  15. Maness, Robert, 1996. "Incomplete contracts and the choice between vertical integration and franchising," Journal of Economic Behavior & Organization, Elsevier, vol. 31(1), pages 101-115, October.
  16. Francine Lafontaine & Kathryn L. Shaw, 1999. "The Dynamics of Franchise Contracting: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 107(5), pages 1041-1080, October.
  17. Muris, Timothy J & Scheffman, David T & Spiller, Pablo T, 1992. "Strategy and Transaction Costs: The Organization of Distribution in the Carbonated Soft Drink Industry," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 1(1), pages 83-128, Spring.
  18. Rajiv Lal, 1990. "Improving Channel Coordination Through Franchising," Marketing Science, INFORMS, vol. 9(4), pages 299-318.
  19. Martin, Robert E, 1988. "Franchising and Risk Management," American Economic Review, American Economic Association, vol. 78(5), pages 954-68, December.
  20. Klein, Benjamin, 1995. "The economics of franchise contracts," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 9-37, October.
  21. 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.
  22. Thompson, R. Steve, 1994. "The franchise life cycle and the Penrose effect," Journal of Economic Behavior & Organization, Elsevier, vol. 24(2), pages 207-218, July.
  23. Norton, Seth W, 1988. "An Empirical Look at Franchising as an Organizational Form," The Journal of Business, University of Chicago Press, vol. 61(2), pages 197-218, April.
  24. Anderson, Evan E., 1984. "The growth and performance of franchise systems: Company versus franchisee ownership," Journal of Economics and Business, Elsevier, vol. 36(4), pages 421-431, December.
  25. 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.
  26. Lutz, Nancy A., 1995. "Ownership rights and incentives in franchising," Journal of Corporate Finance, Elsevier, vol. 2(1-2), pages 103-131, October.
  27. Mathewson, G Frank & Winter, Ralph A, 1985. "The Economics of Franchise Contracts," Journal of Law and Economics, University of Chicago Press, vol. 28(3), pages 503-26, October.
  28. Dnes, Antony W, 1993. "A Case-Study Analysis of Franchise Contracts," The Journal of Legal Studies, University of Chicago Press, vol. 22(2), pages 367-93, June.
  29. Francine Lafontaine & Margaret E. Slade, 1998. "Incentive Contracting and the Franchise Decision," NBER Working Papers 6544, National Bureau of Economic Research, Inc.
  30. Kaufmann, Patrick J & Lafontaine, Francine, 1994. "Costs of Control: The," Journal of Law and Economics, University of Chicago Press, vol. 37(2), pages 417-53, October.
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