Contractual Arrangements in Franchising: An Empirical Investigation

Agrawal, Deepak; Lal, Rajiv

doi:10.1177/002224379503200208

Cited by 67 publications

(38 citation statements)

References 12 publications

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“…YEARS indicates the number of years that a chain has been working as a franchise, and is an indicator of its survival in the market (Bates 1998;Lafontaine and Shaw 1998;Shane and Foo 1999). SIZE is the total number of establishments held by each chain and proxies the relevance of the franchisor's brand name in the market (Lafontaine 1992;Agrawal and Lal 1995;Arruñada et al 2001) and, therefore, its success. Return on assets (ROA), defined as Operating results/Total assets, indicates the company's performance achieved as a result of its investment in assets, irrespective of its financial structure.…”

Section: Empirical Evidence 21 Data and Cluster Analysismentioning

confidence: 99%

“…Additionally, we are not aware of any study showing the design differences between contracts used by successful and less successful franchise chains. There are works focused on determining how certain contractual clauses affect performance (Agrawal and Lal 1995;Shane 1998;Michael 2000b;Azoulay and Shane 2001;Shane et al 2006;Michael and Combs 2008;Lafontaine and Slade 2013), but they do not consider the contract as a whole or the different degree of detail in the contract specifications (i.e. relating contractual completeness with chain success, or assessing which type of franchisee obligations are most relevant).…”

Section: Introductionmentioning

confidence: 99%

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Differences in contract design between successful and less successful franchises

Solís-Rodríguez

González-Dı́az

2015

Eur J Law Econ

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The aim of this paper is to identify differences in contract design between successful and less successful franchise chains. Comparing contracts from both groups of companies, we observe, on the one hand, that (1) franchise contracts are unbalanced irrespective of the chain's success: contracts cover franchisees' obligations more than franchisors' obligations. On the other hand, we find that (2) contracts in successful franchise chains are more complete (i.e. cover a larger number of contingencies) than the less successful ones and (3) this difference lies in the contingencies regarding franchisees' obligations, which are more fully covered in the contracts of more successful chains. More specifically, within the contingencies regarding franchisees' obligations, (4) successful chains restrict the franchisee decision rights more frequently on day-to-day business operations than on financial conditions or post-contractual contingencies. These findings can be explained because successful chains are more sensitive to franchisees' opportunistic behavior, because they have learned how to manage and solve any potential conflicts, or because of differences in bargaining power. Finally (5) franchisors' obligations are not statistically different between groups, which we interpret as evidence that relational contracting mechanisms do not substitute formalization.

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Section: Empirical Evidence 21 Data and Cluster Analysismentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Differences in contract design between successful and less successful franchises

Solís-Rodríguez

González-Dı́az

2015

Eur J Law Econ

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“…The franchisor chooses the terms of the franchise contract with the objective to motivate the franchisee to work diligently, but also to commit himself to exerting effort (see, e.g., Agrawal and Lal 1995). In this case, the royalty rate is the component of the franchise contract providing incentives to the franchisor and the franchisee to ensure ongoing effort from both contracting parties.…”

Section: Hypotheses Concerning the Royalty Rate In Franchise Contractsmentioning

confidence: 99%

Contractual relations and organizational structure in franchising

Rohlfing

Sturm

2011

Z Betriebswirtsch

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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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“…Revenue sharing is also analyzed as a component of franchising arrangements by Lal (1990), as well as by Chiu and Hu (2003). These articles show that revenue sharing can be a powerful instrument for coordinating the efforts of the franchisor and the franchisees (for empirical evidence, see Agrawal and Lal 1995). The studies of Chwolka and Simons (2003) and Martini (2007) are a good starting point for examining in depth revenue sharing and the effects of specific investments on revenue in a decentralized company.…”

Section: Literature Reviewmentioning

confidence: 99%

Coordination of supply chain investments and the advantage of revenue sharing

Lohmann

2010

Z Betriebswirtsch

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As examples of the practice show, revenue-sharing agreements between independent companies are arranged to coordinate a supply chain. Using an incomplete contracting model this article identifies conditions under which revenue-sharing agreements as well as pricing agreements are favorable for the involved companies. The main results show that revenue sharing increases the investment tendency of the upstream company to make revenue-affecting specific investments and, under certain circumstances, increases the expected profit of both companies. Therefore, revenue sharing should be used if the success of the supply chain depends on a supply chain-crossing differentiation strategy.

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Contractual Arrangements in Franchising: An Empirical Investigation

Cited by 67 publications

References 12 publications

Differences in contract design between successful and less successful franchises

Differences in contract design between successful and less successful franchises

Contractual relations and organizational structure in franchising

Coordination of supply chain investments and the advantage of revenue sharing

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