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Financial Constraints and Franchising Decisions

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  • Kai-Uwe Kuhn

    (University of Michigan)

  • Francine Lafontaine

    (University of Michigan)

  • Ying Fan

    (University of Michigan)

Abstract

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.

Suggested Citation

  • Kai-Uwe Kuhn & Francine Lafontaine & Ying Fan, 2013. "Financial Constraints and Franchising Decisions," 2013 Meeting Papers 933, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:933
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    References listed on IDEAS

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    1. 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.
    2. 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.
    3. Gregory S. Crawford & Ali Yurukoglu, 2012. "The Welfare Effects of Bundling in Multichannel Television Markets," American Economic Review, American Economic Association, vol. 102(2), pages 643-685, April.
    4. Gian Luca Clementi & Hugo A. Hopenhayn, 2006. "A Theory of Financing Constraints and Firm Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 121(1), pages 229-265.
    5. Céline Bonnet & Pierre Dubois, 2010. "Inference on vertical contracts between manufacturers and retailers allowing for nonlinear pricing and resale price maintenance," RAND Journal of Economics, RAND Corporation, vol. 41(1), pages 139-164.
    6. Francine Lafontaine, 1992. "Agency Theory and Franchising: Some Empirical Results," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 263-283, Summer.
    7. 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.
    8. Atif R. Mian & Amir Sufi, 2012. "What explains high unemployment? The aggregate demand channel," NBER Working Papers 17830, National Bureau of Economic Research, Inc.
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