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Costs of Control: The

Listed author(s):
  • Kaufmann, Patrick J
  • Lafontaine, Francine

The main purpose of this article is to establish empirically, using financial data, that there are both ex ante and ex post rents left downstream at McDonald's. We find that the present value of the ex ante rents is around $300K-$455K 1982 dollars. Ex post rents are, of course, even larger. We argue that ex post rents represent an incentive mechanism that complements the use of profit-sharing rights at McDonald's. We also argue that ex ante rents arise here because franchisees' wealth constraints prevent the up-front extraction of the full present value of the ex post rents. Finally, we note McDonald's desire for a particular type of individual to operate its franchises--namely, owner-operators whose livelihoods are tied to the success of their outlets--increases the likelihood that downstream operators face liquidity constraints. This in turn contributes to the need for McDonald's to leave ex ante rents downstream. Copyright 1994 by the University of Chicago.

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File URL: http://dx.doi.org/10.1086/467319
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Article provided by University of Chicago Press in its journal Journal of Law & Economics.

Volume (Year): 37 (1994)
Issue (Month): 2 (October)
Pages: 417-453

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Handle: RePEc:ucp:jlawec:v:37:y:1994:i:2:p:417-53
Contact details of provider: Web page: http://www.journals.uchicago.edu/JLE/

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  1. Smith, Richard L, II, 1982. "Franchise Regulation: An Economic Analysis of State Restrictions on Automobile Distribution," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 125-157, April.
  2. Alan B. Krueger, 1991. "Ownership, Agency, and Wages: An Examination of Franchising in the Fast Food Industry," The Quarterly Journal of Economics, Oxford University Press, vol. 106(1), pages 75-101.
  3. Laffont, Jean-Jacques & Tirole, Jean, 1988. "The Dynamics of Incentive Contracts," Econometrica, Econometric Society, vol. 56(5), pages 1153-1175, September.
  4. William Hallagan, 1978. "Self-Selection by Contractual Choice and the Theory of Sharecropping," Bell Journal of Economics, The RAND Corporation, vol. 9(2), pages 344-354, Autumn.
  5. Klein, Benjamin & Saft, Lester F, 1985. "The Law and Economics of Franchise Tying Contracts," Journal of Law and Economics, University of Chicago Press, vol. 28(2), pages 345-361, May.
  6. Minkler, Alanson P., 1990. "An empirical analysis of a firm's decision to franchise," Economics Letters, Elsevier, vol. 34(1), pages 77-82, September.
  7. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-444, June.
  8. Klein, Benjamin & Murphy, Kevin M, 1988. "Vertical Restraints as Contract Enforcement Mechanisms," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 265-297, October.
  9. D. L. Noren, 1990. "The Economics of the Golden Arches: A Case Study of the Mcdonald's System," The American Economist, , vol. 34(2), pages 60-64, October.
  10. 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.
  11. Gary S. Becker & George J. Stigler, 1974. "Law Enforcement, Malfeasance, and Compensation of Enforcers," The Journal of Legal Studies, University of Chicago Press, vol. 3(1), pages 1-18, January.
  12. 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 223-233, April.
  13. 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 503-526, October.
  14. 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.
  15. 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.
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