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The Factors of Revenue-Sharing Contracts in Franchising: Evidence from the Korean Franchise Industry

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  • Jungwon Yeo

Abstract

I examine whether the existing theories on revenue-sharing contracts can explain variations in the terms of franchise contracts, including royalty rates, the degree of revenue-sharing, and the mix of franchising and company ownership (contract-mixing), in the Korean franchise industry. This study utilizes a unique dataset that I assembled on 300 franchise systems in the franchised restaurant industry in Korea. I find the capital constraint-based explanation is more consistent in explaining the franchise fee, whereas the moral hazard-based explanation is more consistent in explaining the royalty rate. Also, the contract length is found one of the most significant explanatory variables. These findings confirm the role of revenue-sharing as a tool to align the contracting parties' incentives and suggest it be a commitment device to a continued collaborative partnership between franchisors and franchisees.

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  • Jungwon Yeo, 2022. "The Factors of Revenue-Sharing Contracts in Franchising: Evidence from the Korean Franchise Industry," International Economic Journal, Taylor & Francis Journals, vol. 36(1), pages 77-102, January.
    • Handle: RePEc:taf:intecj:v:36:y:2022:i:1:p:77-102
    DOI: 10.1080/10168737.2022.2029929
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