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Financial Constraints and Moral Hazard: The Case of Franchising

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  • Ying Fan
  • Kai-Uwe Kühn
  • Francine Lafontaine

Abstract

Financial constraints are considered an important impediment to growth for small businesses. We study theoretically and empirically the relationship between the financial constraints of agents and the organizational decisions and growth of principals, in the context of franchising. We find that a 30 percent decrease in average collateralizable housing wealth in an area is associated with a delay in chains’ entry into franchising by 0.33 year on average, or 10 percent of the average waiting time, and a reduction in chain growth and hence a reduction in franchised chain employment of about 9 percent.

Suggested Citation

  • Ying Fan & Kai-Uwe Kühn & Francine Lafontaine, 2017. "Financial Constraints and Moral Hazard: The Case of Franchising," Journal of Political Economy, University of Chicago Press, vol. 125(6), pages 2082-2125.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/694566
    DOI: 10.1086/694566
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    7. Lømo, Teis Lunde, 2020. "Vertical control, opportunism, and risk sharing," Economics Letters, Elsevier, vol. 191(C).
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    9. Sertsios, Giorgo, 2020. "Corporate finance, industrial organization, and organizational economics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    10. Hvide, Hans K. & Meling, Tom G., 2019. "Do Temporary Demand Shocks have Long-Term Effects for Startups?," CEPR Discussion Papers 14131, C.E.P.R. Discussion Papers.
    11. Wei Lin & Frank Mathewson & Junji Xiao, 2024. "Screening Through Investment: Evidence from the Chinese Automobile Industry," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 64(4), pages 471-513, June.

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    More about this item

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • L8 - Industrial Organization - - Industry Studies: Services

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