Contractual relations and organizational structure in franchising |
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Authors: | Anna Rohlfing Philipp Sturm |
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Institution: | 1.Lehrstuhl für Organisationstheorie,WHU – Otto Beisheim School of Management,Vallendar,Germany;2.Abteilung Bankwirtschaft,Universit?t Tübingen,Tübingen,Germany |
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Abstract: | In this paper, we employ a new dataset based on a sample of 123 franchise systems originating from Germany to empirically
test hypotheses stemming from agency theory and capital scarcity considerations on the contractual relations and the organizational
structure in franchising. We include proxies for the franchisor’s capital scarcity as well as for moral hazard on the franchisee’s
and the franchisor’s side. Furthermore, we distinguish between initial and ongoing franchisor support. Our results indicate that agency models based on double moral hazard do explain the design of franchise
contracts and the organizational structure in terms of the proportion of franchised outlets. We find that the incentive component
of the franchise contract (the royalty rate) is not influenced by moral hazard on the franchisee’s side, but rather by moral
hazard on the franchisor’s side. Furthermore, the proportion franchised is strongly influenced by moral hazard on the franchisee’s
side. Hence, after providing incentives to outlet managers by turning them into franchisees, thereby granting them residual
claimancy, the royalty rate mainly serves to ensure ongoing franchisor input. The franchisor’s capital scarcity influences
the fixed fee in franchise contracts and the proportion of franchised outlets, thus supporting standard capital scarcity arguments. |
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