IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this article

Incentive Conflicts and Contractual Restraints: Evidence from Franchising

  • Brickley, James A
Registered author(s):

    This study uses agency theory to develop testable implications about three provisions commonly observed in franchise contracts: (1) restrictions on passive ownership, (2) area development plans, and (3) mandatory advertising expenditures. The primary hypothesis is that these provisions are most likely when there are significant externalities among the units within the franchise system. The evidence, based on a large sample of franchise contracts, is generally consistent with this hypothesis. The evidence also suggests that these incentive instruments are complements. In contrast to the theory, most of the results do not support the hypothesis that the percentage of company-owned units is related to externalities within the system. Franchisee risk aversion and/or wealth constraints appear more important. While the study focuses on franchising, the results provide insights into related provisions in other contracts. Copyright 1999 by the University of Chicago.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://dx.doi.org/10.1086/467441
    Download Restriction: Access to the online full text or PDF requires a subscription.

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by University of Chicago Press in its journal Journal of Law & Economics.

    Volume (Year): 42 (1999)
    Issue (Month): 2 (October)
    Pages: 745-74

    as
    in new window

    Handle: RePEc:ucp:jlawec:v:42:y:1999:i:2:p:745-74
    Contact details of provider: Web page: http://www.journals.uchicago.edu/JLE/

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. 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 265-97, October.
    2. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
    3. anonymous, 1994. "Research confirms rationality of analysts' forecasts," Economics Update, Federal Reserve Bank of Atlanta, issue Apr, pages 2.
    4. 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.
    5. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April.
    6. George Baker & Michael Gibbs & Bengt Holmstrom, 1994. "The Wage Policy of a Firm," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 921-955.
    7. 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.
    8. Holmstrom, Bengt & Milgrom, Paul, 1994. "The Firm as an Incentive System," American Economic Review, American Economic Association, vol. 84(4), pages 972-91, September.
    9. Kaufmann, Patrick J. & Dant, Rajiv P., 1996. "Multi-unit franchising: Growth and management issues," Journal of Business Venturing, Elsevier, vol. 11(5), pages 343-358, September.
    10. Gompers, Paul & Lerner, Josh, 1996. "The Use of Covenants: An Empirical Analysis of Venture Partnership Agreements," Journal of Law and Economics, University of Chicago Press, vol. 39(2), pages 463-98, October.
    11. Paul Joskow, 1984. "Vertical Integration and Long Term Contracts: The Case of Coal Burning Electric Generating Plants," Working papers 361, Massachusetts Institute of Technology (MIT), Department of Economics.
    12. Lafontaine, Francine, 1993. "Contractual Arrangements as Signaling Devices: Evidence from Franchising," Journal of Law, Economics and Organization, Oxford University Press, vol. 9(2), pages 256-89, October.
    13. 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 345-61, May.
    14. ., 1994. "Firm, Theoru of the (II)," Chapters, in: The Elgar Companion to Institutional and Evolutionary Economics, chapter 45 Edward Elgar Publishing.
    15. ., 1994. "Firm, Theoru of the (I)," Chapters, in: The Elgar Companion to Institutional and Evolutionary Economics, chapter 44 Edward Elgar Publishing.
    16. 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.
    17. Ichniowski, Casey & Shaw, Kathryn & Prennushi, Giovanna, 1997. "The Effects of Human Resource Management Practices on Productivity: A Study of Steel Finishing Lines," American Economic Review, American Economic Association, vol. 87(3), pages 291-313, June.
    18. Francine Lafontaine, 1992. "Agency Theory and Franchising: Some Empirical Results," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 263-283, Summer.
    19. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, March.
    20. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    21. ., 1994. "Firm, Boundaries of the," Chapters, in: The Elgar Companion to Institutional and Evolutionary Economics, chapter 43 Edward Elgar Publishing.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:ucp:jlawec:v:42:y:1999:i:2:p:745-74. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Journals Division)

    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.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with 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 profile, as there may be some citations waiting for confirmation.

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

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.