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Financial Constraints and Franchising Decisions

  • Kai-Uwe Kuhn

    (University of Michigan)

  • Francine Lafontaine

    (University of Michigan)

  • Ying Fan

    (University of Michigan)

We study how the financial constraints of agents affect the behavior of principals in the context of franchising. We develop an empirical model of franchising starting with a principal-agent framework that emphasizes the role of franchisees' collateral from an incentive perspective. We estimate the determinants of chains' entry (into franchising) and growth decisions using data on franchised chains and data on local macroeconomic conditions. In particular, we use collateralizable housing wealth at the state level as an inverse measure of the average financial constraints of potential franchisees. We find that a decrease in collateralizable housing wealth in the local economy leads to both later entry into franchising by local franchisors, and slower growth in the number of franchised -- and total -- outlets in these chains. We show that the corresponding job losses can be substantial.

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File URL: https://economicdynamics.org/meetpapers/2013/paper_933.pdf
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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 933.

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Date of creation: 2013
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Handle: RePEc:red:sed013:933
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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