An Extended Transaction Cost Model of Decision Rights Allocation in Franchising: The Moderating Role of Trust

Abstract

This study develops and tests an extended transaction cost model to explain the structure of decision rights in franchising. Results show that the inclusion of trust in the transaction cost model supplements the transaction cost explanation of the allocation of decision rights in franchising. On the basis of the data from the German franchise sector, we found that environmental uncertainty has a negative effect on the allocation of decision rights to franchisees because the franchisor exercises more control over local outlet decisions when the local market environment is highly uncertain. Contrary to the traditional transaction cost view, we found that behavioral uncertainty has a positive effect on the allocation of decision rights to franchisees. This result implies that franchisors are more likely to delegate decision rights to franchisees when they encounter difficulties in measuring franchisees' performance and controlling their behavior. Finally, trust has a moderating effect on the relationship between transaction cost variables and franchisor's propensity to delegate decision rights to franchisees. Copyright © 2013 John Wiley & Sons, Ltd.

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