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Preliminary evidence on the appointment of institutional solutions to franchisor moral hazard-the case of franchisee councils

  • Olivier Cochet

    (Westfälische Wilhelms-Universität Münster, Department of Strategic Management, Münster, Germany)

  • Thomas Ehrmann

    (Westfälische Wilhelms-Universität Münster, Department of Strategic Management, Münster, Germany)

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    Besides franchisee opportunistic behavior, franchisor moral hazard is a central concern in franchise chains. Economic literature thus far focused on the sharing of franchisee revenues as an incentive for curbing franchisor malfeasance. In this paper, we ask whether and how the obligations of chains may be enforced through institutional arrangements like franchisee councils. Consistent with expectations, the appointment of a council empirically turned out to be more likely as decision rights-a proxy for the scope of moral hazard-were increasingly allocated to companies' management. We found this relationship to be negatively moderated by the contractual share parameter. Copyright © 2007 John Wiley & Sons, Ltd.

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    File URL: http://hdl.handle.net/10.1002/mde.1312
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    Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

    Volume (Year): 28 (2007)
    Issue (Month): 1 ()
    Pages: 41-55

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    Handle: RePEc:wly:mgtdec:v:28:y:2007:i:1:p:41-55
    Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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    1. Edward C. Norton & Hua Wang & Chunrong Ai, 2004. "Computing interaction effects and standard errors in logit and probit models," Stata Journal, StataCorp LP, vol. 4(2), pages 154-167, June.
    2. Mathewson, Frank & Winter, Ralph, 1994. "Territorial Restrictions in Franchise Contracts," Economic Inquiry, Western Economic Association International, vol. 32(2), pages 181-92, April.
    3. Francine Lafontaine & Kathryn L. Shaw, 1996. "The Dynamics of Franchise Contracting: Evidence from Panel Data," NBER Working Papers 5585, National Bureau of Economic Research, Inc.
    4. Benito Arruñada & Luis Garicano & Luis Vázquez, 1999. "Contractual allocation of decision rights and incentives: The case of automobile distribution," Economics Working Papers 424, Department of Economics and Business, Universitat Pompeu Fabra.
    5. Etienne Pfister & Bruno Deffains & Myriam Doriat-Duban & Stéphane Saussier, 2006. "Institutions and contracts: Franchising," European Journal of Law and Economics, Springer, vol. 21(1), pages 53-78, January.
    6. Darr, Eric D. & Kurtzberg, Terri R., 2000. "An Investigation of Partner Similarity Dimensions on Knowledge Transfer," Organizational Behavior and Human Decision Processes, Elsevier, vol. 82(1), pages 28-44, May.
    7. Brickley, James A, 1999. "Incentive Conflicts and Contractual Restraints: Evidence from Franchising," Journal of Law and Economics, University of Chicago Press, vol. 42(2), pages 745-74, October.
    8. 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.
    9. Dant, Rajiv P. & Nasr, Nada I., 1998. "Control techniques and upward flow of information in franchising in distant markets: conceptualization and preliminary evidence," Journal of Business Venturing, Elsevier, vol. 13(1), pages 3-28, January.
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