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Entrepreneurial orientation, risk and incentives: the case of franchising

Author

Listed:
  • Muriel Fadairo

    (GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - ENS de Lyon - École normale supérieure de Lyon - Université de Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet - Saint-Étienne - CNRS - Centre National de la Recherche Scientifique)

  • Cintya Lanchimba

    (EPN - Escuela Politécnica Nacional)

  • Josef Windsperger

    (Department of Business Administration - Universität Wien = University of Vienna)

Abstract

The standard principal-agent model predicts a trade-off in contract design between the protection against risk and incentive motivations. Distinguishing two types of risks, we show that, contrary to this traditional view, the relationship between risk and incentives can be positive. In franchise contracting, this implies that the royalty rate decreases with the risk faced by the franchisee on the local market. Using a unique panel dataset combining French franchise and financial data, we address this issue empirically, alongside performance outcomes. The data support the hypothesis of a negative relationship between risk and the royalty rate, which contradicts the prediction of the standard agency theory. Furthermore, our estimations provide evidence that chain performance increases with an adjusted royalty rate. This paper has important implications for contract design, showing that with increasing local market uncertainty and low-risk aversion, franchisors should reduce the royalty rate.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Muriel Fadairo & Cintya Lanchimba & Josef Windsperger, 2018. "Entrepreneurial orientation, risk and incentives: the case of franchising," Post-Print halshs-01611633, HAL.
    • Handle: RePEc:hal:journl:halshs-01611633
    DOI: 10.1007/s11187-017-9885-3
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    Cited by:

    1. Jell-Ojobor, Maria & Hajdini, Ilir & Windsperger, Josef, 2022. "Governance of international franchise networks: Combining value creation and value appropriation perspectives," Journal of Business Research, Elsevier, vol. 139(C), pages 267-279.
    2. Kayed, Mohammad & Kacker, Manish & Wu, Ruhai & Sadeh, Farhad, 2025. "The impact of brand equity on vertical integration in franchise systems," Journal of Retailing, Elsevier, vol. 101(2), pages 197-216.
    3. Tania Dabeva & Georgina Lukanova, 2020. "Features Of Connectivity Among Franchising Networks In Hotel Industry," Anniversary Scientific Conference with International Participation TOURISM AND CONNECTIVITY 2020, University publishing house "Science and Economics", University of Economics - Varna, issue 1, pages 473-479, October.
    4. Boulay, Jacques & Caemmerer, Barbara & Evanschitzky, Heiner & Duniach, Krista, 2020. "Multi-unit franchising from franchisor and franchisee perspectives: Antecedents, performance outcomes, and the optimal mini-chain size," Journal of Business Research, Elsevier, vol. 113(C), pages 49-58.
    5. Bertrand, Jean-Louis & Brusset, Xavier & Chabot, Miia, 2021. "Protecting franchise chains against weather risk: A design science approach," Journal of Business Research, Elsevier, vol. 125(C), pages 187-200.
    6. Lanchimba, Cintya & Welsh, Dianne H.B. & Fadairo, Muriel & Silva, Vivian-Lara D.S., 2021. "The impact of franchisor signaling on entrepreneurship in emerging markets," Journal of Business Research, Elsevier, vol. 131(C), pages 337-348.
    7. Kayed, Mohammad & Kacker, Manish & Wu, Ruhai & Sadeh, Farhad, 2025. "The impact of brand equity on vertical integration in franchise systems," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 101(2), pages 197-216.
    8. Mohammad Kayed & Manish Kacker & Ruhai Wu & Farhad Sadeh, 2025. "The impact of brand equity on vertical integration in franchise systems," Papers 2508.06824, arXiv.org.

    More about this item

    JEL classification:

    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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