IDEAS home Printed from https://ideas.repec.org/a/ucp/jpolec/doi10.1086-694566.html
   My bibliography  Save this article

Financial Constraints and Moral Hazard: The Case of Franchising

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: http://dx.doi.org/10.1086/694566
    Download Restriction: Access to the online full text or PDF requires a subscription.
    File URL: http://dx.doi.org/10.1086/694566
    Download Restriction: Access to the online full text or PDF requires a subscription.
    File URL: https://libkey.io/10.1086/694566?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or search for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. 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.
    2. Ronald S. Jarmin & Shawn D. Klimek & Javier Miranda, 2009. "The Role of Retail Chains: National, Regional and Industry Results," NBER Chapters, in: Producer Dynamics: New Evidence from Micro Data, pages 237-262, National Bureau of Economic Research, Inc.
    3. Ana M. Aizcorbe & Arthur B. Kennickell & Kevin B. Moore, 2003. "Recent changes in U.S. family finances: evidence from the 1998 and 2001 Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), vol. 89(Jan), pages 1-32, January.
    4. Oriana Bandiera, 1999. "On the Structure of Tenancy contracts: Theory and Evidence fron 19th Century Rural Sicily," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 19, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    5. Dubois, Pierre, 2002. "Moral hazard, land fertility and sharecropping in a rural area of the Philippines," Journal of Development Economics, Elsevier, vol. 68(1), pages 35-64, June.
    6. Thomas Chaney & David Sraer & David Thesmar, 2012. "The Collateral Channel: How Real Estate Shocks Affect Corporate Investment," American Economic Review, American Economic Association, vol. 102(6), pages 2381-2409, October.
    7. Daniel A. Ackerberg & Maristella Botticini, 2002. "Endogenous Matching and the Empirical Determinants of Contract Form," Journal of Political Economy, University of Chicago Press, vol. 110(3), pages 564-591, June.
    8. Philippon, Thomas & Midrigan, Virgiliu, 2011. "Household Leverage and the Recession," CEPR Discussion Papers 8381, C.E.P.R. Discussion Papers.
    9. Francine Lafontaine, 1992. "Agency Theory and Franchising: Some Empirical Results," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 263-283, Summer.
    10. 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.
    11. Teresa C Fort & John Haltiwanger & Ron S Jarmin & Javier Miranda, 2013. "How Firms Respond to Business Cycles: The Role of Firm Age and Firm Size," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 61(3), pages 520-559, August.
    12. Alma Cohen & Liran Einav, 2007. "Estimating Risk Preferences from Deductible Choice," American Economic Review, American Economic Association, vol. 97(3), pages 745-788, June.
    13. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521818728, October.
    14. Francine Lafontaine & Margaret Slade, 2007. "Vertical Integration and Firm Boundaries: The Evidence," Journal of Economic Literature, American Economic Association, vol. 45(3), pages 629-685, September.
    15. Blair,Roger D. & Lafontaine,Francine, 2011. "The Economics of Franchising," Cambridge Books, Cambridge University Press, number 9780521775892, September.
    16. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-855, September.
    17. Adelino, Manuel & Schoar, Antoinette & Severino, Felipe, 2015. "House prices, collateral, and self-employment," Journal of Financial Economics, Elsevier, vol. 117(2), pages 288-306.
    18. Gonzalez-Diaz, Manuel & Solis-Rodriguez, Vanesa, 2012. "Why do entrepreneurs use franchising as a financial tool? An agency explanation," Journal of Business Venturing, Elsevier, vol. 27(3), pages 325-341.
    19. Bester, Helmut, 1987. "The role of collateral in credit markets with imperfect information," European Economic Review, Elsevier, vol. 31(4), pages 887-899, June.
    20. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521524131, October.
    21. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521818735, October.
    22. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521524124, October.
    23. Callum Jones & Virgiliu Midrigan & Thomas Philippon, 2022. "Household Leverage and the Recession," Econometrica, Econometric Society, vol. 90(5), pages 2471-2505, September.
    24. Francine Lafontaine & Kathryn L. Shaw, 2005. "Targeting Managerial Control: Evidence from Franchising," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 131-150, Spring.
    25. Atif R. Mian & Amir Sufi, 2012. "What explains high unemployment? The aggregate demand channel," NBER Working Papers 17830, National Bureau of Economic Research, Inc.
    26. Ying Fan & Mo Xiao, 2015. "Competition and subsidies in the deregulated US local telephone industry," RAND Journal of Economics, RAND Corporation, vol. 46(4), pages 751-776, October.
    27. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521818742, October.
    28. Dewatripont,Mathias & Hansen,Lars Peter & Turnovsky,Stephen J. (ed.), 2003. "Advances in Economics and Econometrics," Cambridge Books, Cambridge University Press, number 9780521524117, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Philippe Cyrenne, 2016. "The Determinants of Dual Distribution Revisited," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 23(2), pages 167-182, July.
    2. Céline Bonnet & Jan Philip Schain, 2020. "An Empirical Analysis Of Mergers: Efficiency Gains And Impact On Consumer Prices," Journal of Competition Law and Economics, Oxford University Press, vol. 16(1), pages 1-35.
    3. Rüdiger Bachmann & Sebastian K. Rüth, 2020. "Systematic Monetary Policy And The Macroeconomic Effects Of Shifts In Residential Loan‐To‐Value Ratios," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(2), pages 503-530, May.
    4. Sertsios, Giorgo, 2020. "Corporate finance, industrial organization, and organizational economics," Journal of Corporate Finance, Elsevier, vol. 64(C).
    5. Francine Lafontaine & Marek Zapletal & Xu Zhang, 2019. "Brighter prospects? Assessing the franchise advantage using census data," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 28(2), pages 175-197, April.
    6. Renáta Kosová & Giorgo Sertsios, 2018. "An Empirical Analysis of Self-Enforcement Mechanisms: Evidence from Hotel Franchising," Management Science, INFORMS, vol. 64(1), pages 43-63, January.
    7. 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.
    8. James Wang, 2020. "Screening soft information: evidence from loan officers," RAND Journal of Economics, RAND Corporation, vol. 51(4), pages 1287-1322, December.
    9. Chen Jiawei & Sacks Michael, 2018. "Going Along or Going Independent? A Dynamic Analysis of Nonprofit Alliances," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 18(2), pages 1-20, April.
    10. 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.
    11. Lømo, Teis Lunde, 2020. "Vertical control, opportunism, and risk sharing," Economics Letters, Elsevier, vol. 191(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Oriana Bandiera, 1999. "On the Structure of Tenancy contracts: Theory and Evidence fron 19th Century Rural Sicily," STICERD - Development Economics Papers - From 2008 this series has been superseded by Economic Organisation and Public Policy Discussion Papers 19, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    2. Dubois, Pierre & Vukina, Tomislav, 2009. "Optimal incentives under moral hazard and heterogeneous agents: Evidence from production contracts data," International Journal of Industrial Organization, Elsevier, vol. 27(4), pages 489-500, July.
    3. Kai-Uwe Kuhn & Francine Lafontaine & Ying Fan, 2013. "Financial Constraints and Franchising Decisions," 2013 Meeting Papers 933, Society for Economic Dynamics.
    4. Azevedo, Eduardo M. & Gottlieb, Daniel, 2019. "An example of non-existence of Riley equilibrium in markets with adverse selection," Games and Economic Behavior, Elsevier, vol. 116(C), pages 152-157.
    5. Arvidsson, Sara, 2010. "Reducing asymmetric information with usage-based automobile insurance," Working Papers 2010:2, Swedish National Road & Transport Research Institute (VTI), revised 03 Feb 2011.
    6. Goldstein, Itay & Razin, Assaf, 2015. "Three Branches of Theories of Financial Crises," Foundations and Trends(R) in Finance, now publishers, vol. 10(2), pages 113-180, 30.
    7. Ashok Rai & Stefan Klonner, 2007. "Adverse Selection in Credit Markets: Evidence from a Policy Experiment," Department of Economics Working Papers 2007-01, Department of Economics, Williams College.
    8. Zenou, Yves & Jellal, Mohamed, 2005. "Ethnic Diversity, Market Structure and Risk Sharing in Developing Countries," CEPR Discussion Papers 5366, C.E.P.R. Discussion Papers.
    9. Eberhard Feess & Bernd Frick & Gerd Muehlheusser, 2004. "Legal Restrictions on Buyout Fees: Theory and Evidence from German Soccer," Diskussionsschriften dp0411, Universitaet Bern, Departement Volkswirtschaft.
    10. Ghatak, Maitreesh & Karaivanov, Alexander, 2014. "Contractual structure in agriculture with endogenous matching," Journal of Development Economics, Elsevier, vol. 110(C), pages 239-249.
    11. Spenkch, Jörg L., 2011. "Adverse selection and moral hazard among the poor: evidence from a randomized experiment," MPRA Paper 31443, University Library of Munich, Germany.
    12. Courty, Pascal & Marschke, Gerald, 2008. "On the Sorting of Physicians across Medical Occupations," IZA Discussion Papers 3862, Institute of Labor Economics (IZA).
    13. Hilt, Eric, 2008. "The negative trade-off between risk and incentives: Evidence from the american whaling industry," Explorations in Economic History, Elsevier, vol. 45(4), pages 424-444, September.
    14. Yutaka ARIMOTO & Tetsuji OKAZAKI & Masaki NAKABAYASHI, 2010. "Agrarian Land Tenancy In Prewar Japan: Contract Choice And Implications On Productivity," The Developing Economies, Institute of Developing Economies, vol. 48(3), pages 293-318, September.
    15. Liran Einav & Amy Finkelstein & Jonathan Levin, 2010. "Beyond Testing: Empirical Models of Insurance Markets," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 311-336, September.
    16. Jose A. Guajardo & Morris A. Cohen & Sang-Hyun Kim & Serguei Netessine, 2012. "Impact of Performance-Based Contracting on Product Reliability: An Empirical Analysis," Management Science, INFORMS, vol. 58(5), pages 961-979, May.
    17. William R. White, 2012. "Ultra easy monetary policy and the law of unintended consequences," Globalization Institute Working Papers 126, Federal Reserve Bank of Dallas.
    18. John Geanakoplos & Robert Axtell & J. Doyne Farmer & Peter Howitt & Benjamin Conlee & Jonathan Goldstein & Matthew Hendrey & Nathan M. Palmer & Chun-Yi Yang, 2012. "Getting at Systemic Risk via an Agent-Based Model of the Housing Market," American Economic Review, American Economic Association, vol. 102(3), pages 53-58, May.
    19. Christian Hellwig, 2004. "Heterogeneous Information and the Benefits of Public Information Disclosures (October 2005)," UCLA Economics Online Papers 283, UCLA Department of Economics.
    20. Gärtner, D.L. & Zhou, J., 2012. "Delays in Leniency Application : Is There Really a Race to the Enforcer’s Door?," Other publications TiSEM cbb8fac0-0cd7-4a0c-a6d4-a, Tilburg University, School of Economics and Management.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ucp:jpolec:doi:10.1086/694566. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Journals Division (email available below). General contact details of provider: https://www.journals.uchicago.edu/JPE .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.