pricing variation within dual distribution chains the different implications of externalities and signaling for high and low quality brands within many of the multioutlet branded chains that dominate the retail and services landscape the organizational form e g company management franchising used to manage an outlet varies from site to site as do the prices charged at those sites i propose that organizational form and prices may be systematically related as a result of brand externalities in particular i develop logic that the relevant form of externality should differ for upper quality tier brands and lower tier brands using panel data on price and organizational form from more than 6 700 branded u s hotels affiliated with 40 dual distribution brands those brands that simultaneously company manage and franchise individual outlets i find that consistent with the brand externality arguments company managed locations have higher prices within high quality chains whereas franchisees price higher in the lower tiers this paper was accepted by bruno cassiman business strategy

the role of market forces in assuring contractual performance the conditions under which transactors can use the market repeat purchase mechanism of contract enforcement are examined increased price is shown to be a means of assuring contractual performance a necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance this will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm specific assets advertising investments thereby become a positive indicator of likely performance

mitigating underinvestment through an it enabled organization form technology it enables a new refinement of the horizontal network organization we show that it can be applied to a hybrid form of market and hierarchy franchis ing and demonstrate how the resulting horizontal network organization can be an improved organization form specifi cally we use it enabled ownership of customers to refine the horizontal network organization and show how that re finement can alleviate the problem of franchise underinvest ment in traditional franchising in traditional franchising each franchise underinvests relative to investments in an integrated firm because the benefits that accrue to other franchises from its investment horizontal externalities are not accounted for in its investment decision ownership of customers is a combination of identifying individual cus tomers with individual franchises monitoring customer trans actions across franchises and transferring benefits between franchises based on those transactions because ownership of customers rewards franchises for the beneficial horizontal externalities generated by their investments the levels of investment that are chosen by franchises may be increased although not to the levels that would occur in an integrated firm as long as it costs are covered the franchisor is always more profitable and if necessary the franchisor and fran chisees can be jointly more profitable consequently if prof its can be redistributed in lump sum form then the fran chisor and franchisees can be individually more profitable the analysis applies to all horizontal organizations where ownership of customers is feasible and where there are sufficient transactions between units for ownership of cus tomers to be worthwhile

determinants of corporate leasing policy the existing finance literature assumes the real operating cash flows from leasing or owning are invariant to the ownership of the asset and focuses on tax related incentives for corporate leasing policy our analysis suggests that taxes are important in identifying potential lessees and lessors but are less important in identifying the specific assets leased we provide a unified analysis of the various incentives affecting the lease versuspurchase decision we then show how these incentives explain the use of contractual provisions such as maintenance clauses deposits options to purchase the asset and metering when a firm buys an asset it obtains both the right to the services of that asset over the period it is owned plus the right to sell the asset at any future date with a lease the firm acquires only the right to the asset s services for a period specified in the contract the existing finance literature analyzing corporate leasing policy concentrates on the tax related incentives to lease or buy e g see miller and upton 19 myers et al 21 lewellen et al 13 franks and hodges 11 and brealey and young 4 we believe that taxes play an important role in explaining certain dimensions of leasing policy for example the choice between manufacturer and third party leasing however taxes provide only a limited explanation of why specific assets are leased rather than owned and for the choice of provisions in lease contracts in this paper we want to accomplish two things 1 to provide a unified analysis of the various incentives affecting the lease versus buy decision and 2 to employ that analysis to explain observed variation in corporate leasing policy in deriving testable hypotheses about the characteristics of lessees lessors the assets leased and provisions in lease contracts we extend the standard leaseversus buy analysis found in corporate finance textbooks e g brealey and myers

spillovers and governance an analysis of knowledge and reputational spillovers in information technology investigating spillovers potential costs and benefits to a firm that extend beyond an individual transaction i integrate transaction cost theory and the knowledge based view of the firm in an effort to better understand the efficient governance of knowledge contracts with detailed task descriptions were associated with transactions with the potential to generate new and reusable knowledge the risk of a firm s technology spilling over to others and the risk of reputation impairing spillovers were associated with suppliers using their own employees rather than subcontractors thus results suggest that the creation and protection of knowledge are key factors in understanding governance decisions

control techniques and upward flow of information in franchising in distant markets conceptualization and preliminary evidence abstract information exchange between franchisees and franchisors is viewed as instrumental for the attainment of both firm specific and systemic goals within franchise systems our study investigates the issue of control and control techniques employed by franchisors to monitor the performance of their franchisees in distant markers with special focus on the role of information exchange a major assumption underlies our work even though in the language of agency theory franchise contracts attempt to align the incentives of the principal i e franchisor and the agent i e franchisee such alignment is not easy to achieve due to basic conflicts in the parties respective goals for instance while franchisees are primarily interested in achieving short term profits franchisors are more concerned about strengthening the brand equity of their systems a perfect upward flow of information i e from franchisees to franchisors therefore is not necessarily guaranteed this paper introduces and empirically evaluates four hypotheses relating franchisees willingness to provide information to their respective franchisors first it is suggested that franchisees willingness to provide information to their franchisors will be positively related to the incidence of repeat purchases since incentives to free ride are expected to be low at such units in repeat customer industries hence franchisees will have little incentive to hide information second it is argued that the greater the age of relationship between the focal franchisee and franchisor the more secure both parties are likely to feel about the projection of this relationship into the future consequently a positive relationship between the age of the franchise relationship and franchisees willingness to provide information to franchisors is proposed next we suggest that the level of competition faced by franchisees is positively related to franchisees willingness to provide information to their franchisors the latter effect is expected for two reasons foremost such franchisees are likely to see the availability of authentic market information as a necessary tool for their franchisors if franchisors are to provide them with accurate localized advice for combating competitive forces second from an agency theory perspective franchisees have an incentive to conceal information about the external environmental factors only if such information serves to explain franchisees business success in terms of forces other than their effort this would not occur in a competitive environment setting finally multi unit franchisees are hypothesized to more willingly provide information to their franchisors than their single unit counterparts given their lower incentives to free ride and the higher level of security felt in their relationships with their franchisors the empirical verification of our contentions was carried out in two stages first we studied in depth the case of lebanon to develop the initial descriptive materials second and based on the first step we surveyed u s based franchisors with franchisees in the middle east and africa to assess our hypotheses results show that while the extent of competition faced by franchisees was found to be an incentive to provide information to franchisors the age of the relationship emerged as a disincentive to sharing information with the franchisors

toward a theory of conflict in the franchise system abstract a focused review of the literature is presented in support of a definition of franchising as an interorganizational form examined from the entrepreneurship perspective then microeconomic and relational exchange theories provide guidance within a transaction cost economics theoretical framework to begin the formulation of a theory of conflict in franchising the analysis provided in this article involves business format franchising we submit that the essential core and uniqueness of business format franchising is the relationship between the franchisee and franchisor our definition of franchising requires a review of individual franchisee and franchisor organizational structures therefore our theoretical analysis begins with a fundamental look at the economic structural differences of the average franchisor and franchisee firms using microeconomic theory this review points to the potential for conflict in profit maximizing behavior between franchisee and franchisor the likelihood is that the differences in behavior will manifest in pricing promotion and new store development next because most business format franchising is contractually based and long term we investigate the theoretical support for establishing and continuing a relationship with fundamental areas of conflict relational exchange theory is used for this analysis transaction cost economics provides a perspective on the governance of the interorganizational form and guides us in the investigation of the ongoing state of the relationship a key to transaction cost analysis is shared assets in the relationship and the degree of transferability of those assets therefore building and maintaining the franchise trademark becomes the theoretical focus for governance of the relationship we propose that franchisor provided services is the principal method of franchisor contract fulfillment and is the framework for informal governance of the relationship the importance and adequacy of the transactions between the franchisee and franchisor affect the perceived value of the trademark and are key to continuing the franchise relationship finally the conflict literature is briefly reviewed to provide a context for the discussion of conflict in franchising and to illustrate that conflict can have a positive or negative effect on the relationship

the economics of franchise contracts as an organizational arrangement the franchise contract lies between anonymous price mediated exchange and centralized intrafirm employment in contrast to conventional market exchange franchise contracts typically impose on franchisees retail quality standards common hours of business price controls and nonlinear payment schedules for example fixed initial royalty fees plus a percentage of gross retail revenues while franchisors typically provide national advertising and training programs monitor and inspect the franchisees performance with varying intensity across industries and hold the residual power to terminate the franchise agreement observations of actual terminations indicate that franchisors sometimes exclude this power franchisors sometimes face persistent queues of potential franchisees in contrast to simple employment contracts franchise agreements provide for sharing of profits through royalties on revenue or output and considerable freedom for independent decisions by local franchisees 1 why do these franchise contracts exist

vertical separation increases gasoline prices i introduction the choice and implications of firm structure remain central questions in industrial economics and for good reason analysis of recent u s census data suggests that within firm transactions now create the same amount of value as those between firms lafontaine and slade 2007 however despite a rich literature describing the potential trade offs involved in choosing between integration and separation little is understood about the consequences of a change in form when both are commonly used in an industry in large part this reflects the difficulty of estimating the marginal impact of an organizational form as its usage is likely driven by many of the same factors determining economic outcomes i add to the literature by estimating the marginal impact of vertical separation in retail gasoline markets where stakeholders have long been skeptical about integrated organizational forms some states have even limited refiner ownership of retail outlets despite an economics literature suggesting that such integration can lower prices by better aligning all parties incentives cooper et al 2005 vita 2000 to account for concern about the endogeneity of form i use panel data methods as well as an instrumental variables iv strategy the combination of the two approaches produces estimates robust to the presence of time invariant and time varying factors that simultaneously influence the choice of form and economic outcomes after accounting for the endogeneity of form i find that switching a station to a vertically separated form increases gasoline prices by amounts equal to 25 45 of the average retail margin these price effect estimates are slightly smaller in magnitude than the results in papers using statewide policy changes to identify the impact of organizational form barron and umbeck 1984 vita 2000 this difference makes sense given the distinct estimation strategies in this paper i identify the impact of form at marginal stations where the refiner is fundamentally indifferent between forms in contrast using policy changes to identify the marginal effect of form conflates marginal stations with inframarginal ones where a freely optimizing refiner would never choose to vertically separate thus one might expect papers using policy changes to overstate the marginal impact of form while accurately estimating the consequences of adopting a law prohibiting a form similarly estimates of the marginal effect of form will not necessarily accurately predict the consequences of a sweeping policy change interestingly i do not find that vertical separation has a statistically significant impact on overall fuel sales i interpret this as indicating that the high powered incentives given to local agents at vertically separated stations induce greater effort to increase local demand this can explain the apparently contradictory result of observing increased prices but not lower sales quantities moreover it is consistent with past theoretical models of vertical separation in gasoline retailing slade 1996 as well as anecdotal impressions of refiners organizational strategies kleit 2005 overall my paper contributes to two different literatures first it adds to a small but growing group of papers that disentangle the effect of form choice from the elements impacting the choice of form the papers in this literature suggest that separation can have widely varying consequences for example novak and stem 2008 find that vertical separation induces a trade off between initial performance and improvement in the automobile industry while forbes and lederman 2010 show that vertically integrated regional airlines are better at minimizing delays and cancellations in contrast kosova et al 2013 find no observable difference in outcomes across organizational forms for hotels associated with a large brand owner the different findings in our respective papers suggest that vertical separation induces local agents to exert effort in different ways in the two industries we examine

franchising liquidity constraints and entry the short and long run incentives to franchise are considered while monitoring problems due to geographic dispersion ensure that franchising is an efficient organizational form in the long run entry costs suggest that franchising is an efficient solution to the formidable problems posed by entry in the short run this explains the intensive use of franchising in the early growth stages followed by a greater proportion of company owned outlets as the system matures

investments to create bargaining power the case of franchising hybrid organizational forms such as franchise systems join two or more independent parties under a contract the ability of each party to achieve its goals depend upon the relative bargaining power in the relationship established by the contract using transaction cost economics and porter s 1980 characterization of sources of bargaining power this paper argues that the franchisor can make investments in activities such as tapered integration and buyer selection to increase its bargaining power and decrease conflict and litigation in a franchise system specifically tapered integration owning some units while franchising others selecting inexperienced franchisees and employing a long training program are predicted to increase the franchisor s bargaining power and the franchisee s compliance with franchisor standards an empirical analysis of litigation in restaurant franchise systems supports the theoretical hypotheses copyright 2000 john wiley sons ltd

explaining interfirm cooperation and performance toward a reconciliation of predictions from the resource based view and organizational economics interfirm cooperation and its performance implications are examined in the context of two widely cited theoretical approaches to organizations broadly speaking the resource based view suggests that firms seek to capitalize on and increase their capabilities and endowments whereas organizational economics asserts that firms focus on minimizing the costs of organizing although these perspectives agree on managers likely actions in many areas their predictions diverge when interfirm cooperation is considered we take a step toward reconciling these differences by positing that firms place resource based concerns in front of considerations from organizational economics when deciding whether or not to engage in interfirm cooperation we examined this prediction using data from 94 publicly held restaurant chains the results support our integrated view but also suggest that giving primacy to resource concerns detracts from the performance of some firms we derive several implications of these findings in an effort to guide subsequent inquiry copyright 1999 john wiley sons ltd

transaction costs corporate hierarchies and the theory of franchising abstract this paper provides a managerial based explanation for franchising that predicts the existence of dual distribution and many commonly observed characteristics of franchise organizations in this model employee managers working under a promotion based system are more efficient than franchisees however there is necessarily a limit to the number of lower level managers that can be effectively motivated under such a system in some industries the economies of scale associated with brand names lead to a minimum efficient number of retail production facilities that is larger than that can be supported by the promotion hierarchy in these cases the firm s best alternative is to franchise

reproducing knowledge inaccurate replication and failure in franchise organizations the recognition that better use of existing knowledge can enhance performance has spawned substantial interest in the replication of productive knowledge within organizations an enduring belief is that when expanding by replication organizations can and should strive to adapt to fit the salient characteristics of new environments yet some have argued that the exploitation of an established template for doing business by replication can be more successful when the template is copied precisely using unique longitudinal data we report a large sample empirical investigation of the survival consequences of accurate replication versus local adaptation by examining the effect that deviation from the template has on the survival chances of franchise units within a large franchise organization

the 1986 us tax reform and the world capital market the 1986 u s tax reform was a policy of tax cut cum base broadening among other things the corporate and personal tax rates were reduced the investment tax credit itc was lifted the depreciation periods of the accelerated cost recovery system acrs were lenghtened and realized capital gains became fully included in the personal tax base this paper gives a brief overview of the main effects on international capital movements that these measures may have drawing on related and more elaborate discussions of the subject in sinn 1987a ch 7 and 1987b the analysis focuses on the interactions between the real and financial spheres of the economy and unlike most of the existing literature on taxation and international capital flows it is based on a microfoundation of the tax influence on the firms marginal investment conditions the main result is that in the presence of accelerated depreciation and the residence principle for interest income taxation not only the base broadening but also the tax cuts may expel capital from the united states

the impact of franchising on labor standards compliance recent studies document pervasive noncompliance with basic labor standards in industries with high concentrations of low wage workers the authors examine how franchising a common form of business organization in low wage industries affects compliance they estimate the effect of franchise ownership on compliance with federal minimum wage and overtime standards in the fast food industry using unique data on top 20 branded restaurants franchised outlets have far higher levels of noncompliance than comparable company owned establishments the authors argue that observed differences arise from internal incentives facing franchisees versus franchisors rather than from external enforcement pressures facing the parties

agency theory and franchising some empirical results this article provides an empirical assessment of various agency theoretic explanations for franchising including risk sharing one sided moral hazard and two sided moral hazard the empirical models use proxies for factors such as risk moral hazard and franchisors need for capital to explain both franchisors decisions about the terms of their contracts royalty rates and up front franchise fees and the extent to which they use franchising in this article i exploit several new sources of data on franchising to construct a cross section of 548 franchisors involved in various business activities in the united states in 1986 the data are most consistent with a model based on two sided moral hazard the empirical models are also more successful at explaining the extent to which franchisors choose to franchise stores than at explaining the terms of franchise contracts finally contrary to the predictions of several theoretical models i find that royalty rates and franchise fees are not negatively related

costs of control the source of economic rents for mcdonald s franchisees the main purpose of this article is to establish empirically using financial data that there are both ex ante and ex post rents left downstream at mcdonald s we find that the present value of the ex ante rents is around 300k 455k 1982 dollars ex post rents are of course even larger we argue that the ex post rents represent an incentive mechanism that complements the use of profit sharing rights at mcdonald s we also argue that ex ante rents arise here because franchisees wealth constraints prevent the up front extraction of the full present value of the ex post rents finally we note that mcdonald s desire for a particular type of individual to operate its franchises namely owner operators whose livelihoods are tied to the success of their outlets increases the likelihood that downstream operators face liquidity constraints this in turn contributes to the need for mcdonald s to leave ex ante rents downstream

nirvana efficiency a comparative test of residual claims and routines two widely adopted views of firm efficiency are agency theorists residual claims and organization theorists routines the agency view holds that ownership structures and their proxies are the primary source of efficiency differences between firms the organization theory view holds that organizational routines are the primary source of efficiency differences between firms we conduct an empirical test that compares the relative value of residual claims and routines in generating firm efficiency while controlling other factors we find support for both views but more importantly find that the average value of routines is roughly an order of magnitude higher than residual claims 1999 elsevier science b v all rights reserved jel classification l 2

adoption transfers and incentives in a franchise network with positive externalities we study franchise arrangements that allow franchisees with exclusive territories to own their customers this permits franchisees to benefit from positive externalities in the franchise network through interfranchise transfers based on the purchases by their customers at other franchises on the network using the structure of a single franchisor and many franchisees we show that in general interfranchise transfers between franchisees and incentives for franchisee investment in the expansion of their customer base are critical both to the size and to the benefits derived from the franchise network specifically we find that when individual franchisees make investments in marketing effort to increase their customer base the franchisor s setting of the interfranchise transfer trades off the positive effects on network size with the negative effects of removing franchisee incentive for investment this result is due to the fact that interfranchise transfers encourage adoption but discourage full investment in marketing effort as compared to first best franchisee investment use of the royalty and the inter franchise transfer directly dissipates franchisee profits and indirectly dissipates franchisee profits through less than universal adoption thereby causing franchisees to underinvest as compared to traditional franchise systems however use of the interfranchise transfer results in franchises making greater investments than they otherwise would

endogenous matching and the empirical determinants of contract form empirical work on contracts typically regresses contract choice on observed principal and agent characteristics if i some of these characteristics are unobserved or partially observed and ii there are incentives whereby particular types of agents end up contracting with particular types of principals estimated coefficients on the observed characteristics may be misleading we address this endogenous matching problem using a data set on agricultural contracts between landlords and tenants in early renaissance tuscany controlling for endogenous matching has an impact on parameters of interest and tenants risk aversion appears to have influenced contract choice

explaining the swollen middle why most transactions are a mix of market and hierarchy why are firms sometimes more efficient than markets at organizing transactions why are most transactions arrayed neither at the pure market nor at the pure hierarchy end of the continuum but rather in the swollen middle incorporating features of both market and hierarchy why don t firms make greater use of price incentives this paper addresses these three questions by developing a model of the choice of institution one key building block is the distinction between organizing methods hierarchy and the price system and institutions firms and markets hierarchy and the price system are two distinct methods for organizing transactions each with particular costs and benefits markets and firms are institutions which use one or both of these methods although markets predominantly use prices and firms rely principally on hierarchy there is not a one to one correspondence between prices and markets or between hierarchy and firms indeed the paper argues that it is generally more efficient to use a mix of both methods than to specialize in either the paper focuses on the enforcement properties of prices and hierarchy hierarchy controls individuals directly by constraining their behavior by imposing behavior constraints while prices do it indirectly by measuring their outputs through price constraints under hierarchy individuals receive a salary to do as told while self employed individuals governed by the price system are rewarded on the basis of their output each system has its own biases using prices maximizes effort minimizes shirking but incites individuals to inflate the price and or reduce the quality of their output it encourages cheating relying on hierarchy results in the opposite bias under hierarchy individuals are not paid in function of their output but instead are rewarded for following directives they have thus strong incentives to minimize effort to shirk unless properly supervised but being paid a fixed sum to follow orders they have few incentives to cheat hence the price system experiences low shirking but potentially high cheating costs while hierarchy faces low cheating but high shirking costs organizing costs are the sum of shirking and cheating costs any given transaction will be organized by the mix of price and hierarchy i e by the mix of price and behavior constraints that minimizes organizing costs a transaction will be organized within a firm if the reduction in cheating costs achieved by replacing price constraints by behavior constraints exceeds the resulting increase in shirking costs and by the market in the opposite case the paper shows that cheating and shirking costs increase more than proportionately as one concentrates in either pure price or behavior constraints hence using a mix of both methods generally minimizes the sum of cheating and shirking costs this explains why most transactions exhibit features of both markets and hierarchy the paper shows clearly the tradeoff involved between price and behavior constraints it explains the costs and benefits of using two types of price incentives in firms piecework and profit centers and predicts when they will be used

moral hazard asset specificity implicit bonding and compensation the case of franchising i introduction there is a large and growing interest in the structuring of compensation to deal with the moral hazard problem much of this literature treats various forms of income sharing such as piece rates and sharecropping as a means for a principal to provide incentives to an agent this literature has been extended to the case of two sided moral hazard where both parties to an exchange may shirk another mechanism to induce effort discussed in the literature is bonding where workers post a bond that is forgone if effort is inadequate klein 1980 and klein and leffler 1981 treat the possibility of specific assets as constituting an implicit bond where poor performance by a firm is penalized by bankruptcy and sale of assets at a loss this paper studies a situation where these issues coalesce the case of compensation arrangements in franchising the typical franchise contract calls for the sharing of franchise income between franchisee and franchisor additionally franchisees may be terminated for poor performance if franchise assets have a degree of specificity the ensuing sale of assets at a loss provides a penalty for poor performance we examine the determinants of franchise royalty rates and fees in this setting while there is a literature on two sided moral hazard and some empirical work on franchising based on this idea none incorporates the potential influence of asset specificity we explicitly consider the role of implicit bonding and asset specificity in conjunction with moral hazard on the part of both trading parties we go beyond previous work in franchising by estimating the effects of asset specificity and other influences on the royalty rate further part of our empirical work utilizes improved micro data on actual franchise contracts our approach and its implications are discussed in section ii consistent with previous work we expect the royalty rate to decrease increase as the importance of the franchisee s franchisor s input increases however more specific capital with the threat of termination acts as an implicit bond and substitutes for a reduced royalty rate in inducing franchisee effort thus we expect royalty rates to increase with asset specificity also unlike other approaches we do not necessarily expect an inverse relationship between the royalty rate and the franchise fee for example the greater the importance of franchisor effort the higher the royalty rate but the franchise fee may also increase if franchise revenue rises by enough our hypotheses are tested using two different data sets an original firm level data set is taken from federal trade commission ftc required uniform franchise offering circulars ufoc 1 in addition data are obtained from bond s 1989 the source book of franchise opportunities the data are discussed and the results presented in section iii we find substantial support for our approach for example factors that increase the importance of the franchisee s effort such as the number of employees supervised lower the royalty rate and increase the franchise fee also a reduction in the specificity of the franchisee s investment due to leasing lowers the royalty rate and raises the franchise fee 2 section iv summarizes our findings and concludes the paper ii the approach and the hypotheses the typical franchising contract consists of a two part payment by the franchisee to the franchisor the franchisee pays an up front nonrefundable franchisee fee and a continuing royalty payment usually a percentage of sales in return the franchisee receives the right to use the franchisor s brand name capital and a method of operation in addition the franchisor provides on going support to the franchisee however the franchisor maintains the right to unilaterally terminate the contract if the franchisor determines that the franchisee is not delivering a product consistent with the quality guaranteed by the brand name

franchising and risk management franchising is an important and controversial form of vertical integration allegations of opportunistic behavior by franchisors have led to calls for public regulation and in some states fairness in franchising laws the advisability of such regulation depends on the long run incentives to franchise if franchising is a temporary step on the path to complete ownership integration regulation may be called for alternatively if complete or partial franchising is a permanen t market solution regulation is at least contestable this paper offer s new evidence on the incentives to franchise copyright 1988 by american economic association

franchising agency problems and the cost of capital explanations for franchising are examined in the context of the us hotel industry the study is distinct from previous research on franchising because it explicitly recognizes the existence of three organizational forms whereas previous research has focused exclusively on two of these three forms the two organizational forms examined in previous work are franchising and company ownership the additional organizational form is company management investor ownership which involves management by the franchisor and ownership by outside investor groups a plausible explanation for the existence of the last organizational form is based on the availability of low cost capital from non chain sources

centralized and decentralized contracts in a moral hazard environment we study the optimal allocation of the contracting capacity in a moral hazard environment centralizing is superior when the principal is able to establish all the contracts with the agents simultaneously and she is able to monitor side contracting between the agents otherwise decentralizing can be a superior strategy we apply our results to a firm s decision on which outlets to franchise they suggest that franchising is more likely to occur the further the store is from headquarters the more isolated it is and in those activities where the risk is low this conclusion is consistent with empirical studies

agency and institutional influences on franchising decisions abstract while the franchising literature has typically relied on agency theory efficiency considerations may not fully explain decisions to expand through franchising or company ownership in this study i re examine franchising decisions using insights from institutional theory the key tenet of institutional theory is that decisions are influenced by isomorphic pressures arising from the environment economic rationales such as the achievement of efficiency are thought of as less pervasive concerns i begin by investigating whether institutional theory explains variance in franchising decisions beyond what is explained by agency theory then i explore the extent to which institutional considerations moderate the relationships between agency considerations and franchising decisions hypotheses are tested on a unique database of 132 french franchise chains empirical results suggest that successful competitors use of franchising explains variance in the focal chain s use of franchising beyond what is explained by the importance of local managerial inputs and the threat of franchisee opportunism in addition the threat of franchise opportunism is less strongly related to the focal chain s use of franchising when successful competitors have a high proportion of franchised outlets overall findings from this study suggest that researchers should supplement agency theory with institutional theory to adequately explain franchising decisions

incentive conflicts and contractual restraints evidence from franchising abstract this study uses agency theory to develop testable implications about three provisions commonly observed in franchise contracts 1 restrictions on passive ownership 2 area development plans and 3 mandatory advertising expenditures the primary hypothesis is that these provisions are most likely when there are significant externalities among the units within the franchise system the evidence based on a large sample of franchise contracts is generally consistent with this hypothesis the evidence also suggests that these incentive instruments are complements in contrast to the theory most of the results do not support the hypothesis that the percentage of company owned units is related to externalities within the system franchisee risk aversion and or wealth constraints appear more important while the study focuses on franchising the results provide insights into related provisions in other contracts

the tenuous trade off between risk and incentives empirical work testing for a negative trade off between risk and incentives has not had much success the data suggest a positive relationship between measures of uncertainty and incentives rather than the posited negative trade off i argue that the existing literature fails to account for an important effect of uncertainty on incentives through the allocation of responsibility to employees when workers operate in certain settings firms are content to assign tasks to workers and monitor their inputs by contrast when the situation is more uncertain they delegate responsibility to workers but to constrain their discretion base compensation on observed output

making new franchise systems work this paper argues that new franchise systems are more likely to survive if they are structured to economize on agency costs after controlling for industry effects and firm age and size this paper shows empirical support for six of nine hypotheses about the linkage between mechanisms for economizing on agency costs and the survival of new franchise systems 1998 by john wiley sons ltd

the law and economics of franchise tying contracts this paper analyzes from an economic perspective current antitrust law with regard to franchising requirements contracts where a franchisee must purchase an input from the franchisor or from a particular supplier designated by the franchisor the law takes an extremely hostile view toward such tie in contracts at least on the surface by stating that tying is a per se offense the court has said that such contractual arrangements generally serve hardly any purpose beyond the suppression of competition 2 and has held it not necessary to demonstrate anticompetitive effect before declaring them illegal the per se standard under which tying arrangements are analyzed is unusual because of the essential role of economic analysis to prove the existence of a per se illegal tying arrangement one must demonstrate economically that three conditions are met first that two separate products exist second that there is sufficient market power in the tying good and third that a not insubstantial amount of commerce in the tied good market is affected 3 in addition the per se standard permits affirmative defenses such as the use of tying for quality control and these also often entail sophisticated economic analysis as justice o connor correctly

an empirical look at franchising as an organizational form franchise contracts are identified as a hybrid form of economic organization motives for the dominance of franchise arrangements are identified by examining the theoretical literature on franchising and related literatures on the theory of the firm firm growth managerial and employee selection a nd brand name capital empirical tests are performed on the incidence of franchise contracts across states for three industries in which f ranchising is prominent and data are readily available the results s uggest that both principal agent incentives and informational incenti ves favor the use of franchise arrangements copyright 1988 by the university of chicago

new firm survival institutional explanations for new franchisor mortality why do some new firms succeed and others fail economists argue that new firms fail because entrepreneurs inefficiently manage production and organizational design williamson 1985 sociologists e g granovetter 1985 have typically viewed this explanation as undersocialized and argue that institutional legitimacy must also be considered to explain the survival of new firms this paper examines the survival of 1292 new franchisors established in the united states from 1979 1996 the results show that institutional legitimacy adds to economic explanations for the survival of new franchisors and suggests the importance of a properly socialized explanation

retail contracting theory and practice we summarize a number of regularities that arise in the empirical literature on contractual relationships between manufacturers and their exclusive resellers we do this using studies of traditional and business format franchise relationships as well as studies of salesforce integration decisions some of the patterns that we uncover are consistent with a standard incentive cum insurance theory of organization while others are not we brie y review some theoretical extensions that seem promising in terms of reconciling seeming con icts between theory and practice i introduction manufacturers of retail products must decide whether to sell their products to consumers themselves vertical integration or to sell via independent retailers vertical separation when manufacturers do not perform the sales function internally but want exclusive retailers they usually choose some form of franchising 1 many theories attempt to explain the choice of retail organizational form moreover a considerable body of empirical evidence concerning this choice is accumulating we attempt to evaluate this econometric evidence and relate it to the theories to accomplish this task we assess studies of franchising arrangements as well as studies of sales force organization in industrial settings the paper is organized as follows in the next section we highlight a number of regularities that arise in the empirical literature on retail contracting in particular we nd that i risk is positively related to the use of high powered incentives vertical separation ii the importance of the agent s eiort in production is positively related to the use of high powered incentives

the effects of new franchisor partnering strategies on franchise system size many young firms use strategic actions to attract partners who help them increase the size of their operations quickly this article examines the use of strategic actions to attract partners and increase system size in the context of franchising we build on research in entrepreneurship marketing organization theory strategic management and finance to develop specific hypotheses about the influences of franchisor pricing policy and strategic control decisions on system size we test these hypotheses empirically using panel data on a sample of 1 292 business format franchise systems from 152 industries that were established in the united states between 1979 and 1996 and followed from their inception forward in time our model accounts for the endogeneity of strategic decisions controls for unobserved firm and industry factors and accounts for selection effects due to system failure the results show that franchisors that grow larger 1 lower royalty rates as the systems age 2 have low up front franchise fees that rise over time 3 own a small proportion of outlets and lower that percentage over time 4 keep franchisees initial investment low and 5 finance their franchisees

demand signalling under unobservable effort in franchising linear and nonlinear price contracts we study the signalling strategy of a principal who is privately informed about its high demand potential to an uninformed risk neutral agent we analyze the model in the context of a contract between a franchisor and a franchisee we examine the distortions of a two part pricing scheme necessary to credibly inform the franchisee agent we also study whether the inability of the franchisor principal to observe the agent s effort moderates or exaggerates the distortions from the first best two part pricing scheme a surprising outcome is that even though the principal incurs greater signalling cost the magnitude of distortion in the two part scheme is smaller when service is unobservable than when it is not thus a signalling strategy employing the fixed and variable fees is harder to detect under moral hazard empirical studies failing to control for moral hazard may incorrectly conclude that signalling strategy does not occur we later consider a three part scheme to verify whether or not the schem

the choice of organizational form the case of franchising abstract we examine companies that franchise some units and centrally operate own others the agency problems confronting these two organizational forms are analyzed testable hypotheses are developed the empirical results support the notion that owning versus franchising reflects a trade off among agency related problems the cost of monitoring store managers appears to be especially important in the own franchise decision the level of repeat business and initial investment requirements per unit also appear to be important

the economic effects of franchise termination laws we would like to thank blake rhodes and pam schommer for excellent research assistance participants in workshops at arizona state university university of california berkeley the university of chicago dartmouth college iowa state university the justice department the university of rochester and the university of utah as well as jeff coles arnold cowan jim dana franklin m fisher stuart gilson ben hermalin cliff holderness gregg jarrell alan krueger wayne mikkelson walter oi jim poterba ajai singh cliff smith kathy spier david weisbach jamie zender jerry zimmerman and especially kevin j murphy and an anonymous referee for comments on an earlier draft brickley and weisbach thank the managerial economics research center of the university of rochester and the john m olin foundation and dark thanks the college of business at iowa state university for financial support brickley also thanks the garn institute of finance at the university of utah for financial assistance 1 see mark robichaut franchise rules are back off drawing board wall st j july 6 1990 at bl note that in this article we focus on laws that apply to business format franchises for an analysis of state laws in automobile franchising see richard l smith ii franchise regulation an economic analysis of state restrictions on automobile distribution 25 j law econ 125 1982 richard a epstein unconscionability a critical appraisal 18 j law econ 293 314 15 1975 and paul h rubin the theory of the firm and the structure of the franchise contract 21 j law econ 223 1978 other work on the economics of franchising includes james a brickley frederick h dark the choice of organizational form the case of franchising 18 j fin econ 401 1987 james a brickley frederick h dark michael s weisbach an agency perspective on franchising 20 fin mgmt 1991 in

to franchise or not to franchise an analysis of decision rights and organizational form shares abstract for innovators and entrepreneurs in service businesses franchising is frequently suggested as a way to succeed and grow academic research has provided little guidance for potential franchisors however this article provides a model to guide that choice of organizational form using results from agency theory analytically franchising is a way to allocate decisions within the franchise system between the franchisor and the franchisee in order to promote efficiency and provide incentives franchisees make decisions regarding local operations such as hours prices and locations because they have the knowledge about local trading conditions franchisors make decisions regarding the product its production and associated marketing efforts that together create the standardization that the trademark signals the revenue of franchise systems is divided to provide incentives to each party to support the allocation of decisions franchisors receive a percentage of gross sales typically 5 to compensate them for use of the trademark and associated services franchisees keep the unit s profits after paying royalties these profits motivate the franchisee to make the good decisions that operate the unit efficiently but franchising has limitations as well first by making franchisees invest in a unit in a specific geographic area the franchise system exposes the franchisees to business risk it consists of local economic conditions beyond franchisees control that could reduce or eliminate their capital that risk could be eliminated by owning a geographically diversified portfolio of shares of units in different places but then incentives are weakened second the requirements of standardization under the common trademark constrain franchisees from the full use of their human capital including their knowledge of local conditions some adaptations to the local market are prohibited by the requirement of standardization so high levels of either business risk or human capital in an industry make franchising a less desirable choice of organizational form these ideas are tested with interindustry data using an econometric discrete choice model on the share of sales through franchise systems termed organizational form share the methodology is identical to market share models used in economics and marketing business risk as measured by percent of units that have failed in the industry in the last 3 years and human capital required in the industry as measured by average wages paid both negatively influence the share of sales through franchise systems the model can be applied by entrepreneurs considering franchising especially in industries not traditionally associated with franchising using public data sources identified in the study a prospective franchisor can research the industry to determine if industry conditions support franchising as the optimal choice of organizational form the empirical texts also suggest a second managerially relevant conclusion the decision of should we franchise can be and should be separated from the decision of how do we implement franchising factors previously shown to influence the implementation of franchising the degree of ownership of units within the system do not influence organizational form share thus suggesting that the strategic decision of whether to franchise is distinct from the operating decision of how to implement franchising

strategic interactions in traditional franchise systems are franchisors always better off abstract the effects of price competition and advertising spillover on franchisees decision to cooperate and on franchisor s contractual preferences are investigated we show that the franchisees decision to cooperate or not depends on the type of franchise contracts under exclusive territory contracts any mode of play between franchisees give the same profits to the franchisees and franchisor contracts that allow price competition and well targeted local advertising offer a good ground for horizontal cooperation which may or may not benefit the franchisor depending on whether the prices are strategic substitutes or strategic complements contracts in which price competition is allowed and the burden of advertising decisions is totally transferred to the franchisor lead to cooperation between franchisees at the expense of the franchisor franchisees do not cooperate to the benefit of the franchisor if local advertising is predatory and price competition is not allowed in the contract but franchisees are given the responsibility to undertake local advertising also the franchisor endorses cooperation between franchisees when local advertising has a public good nature but such a cooperation may never occur when the impact of local advertising on demand is significant we finally show that while some contracts always dominate others the choice of a franchise contract may also depend on local competition and or the franchise goodwill

what we talk about when we talk about global mindset managerial cognition in multinational corporations recent developments in the global economy and in multinational corporations have placed significant emphasis on the cognitive orientations of managers giving rise to a number of concepts such as global mindset that are presumed to be associated with the effective management of multinational corporations this paper reviews the literature on global mindset and clarifies some of the conceptual confusion surrounding the construct we identify common themes across writers suggesting that the majority of studies fall into one of three research perspectives cultural strategic and multidimensional we also identify two constructs from the social sciences cosmopolitanism and cognitive complexity that underlie the perspectives found in the literature we then use these two constructs to develop an integrative theoretical framework of global mindset we then provide a critical assessment of the field of global mindset and suggest directions for future theoretical and empirical research

first mover advantage through distribution a decomposition approach whereas the extant literature on entry order effects establishes that first entrants often earn higher market shares market share advantage the literature on distribution suggests that increased distribution has a positive effect on sales can distribution help us better understand entry order effects on market shares this paper examines how the first entrant in a geographical market achieves a market share advantage through distribution for this purpose i propose a simple method of decomposing sales into physical distribution and sales performance the data come from a manually collected panel on six major japanese convenience store chains from 47 geographical markets between 1991 and 2007 using an instrumental variable approach to address the potential endogeneity of entry order i find first entrants have a positive market share advantage over later entrants specifically the physical distribution measured by the number of outlets in a market drives most of the advantage meanwhile the pos

an empirical analysis of territorial encroachment within franchised and company owned branded chains franchisees within large branded chains loudly complain of a form of channel conflict known as encroachment or impact encroachment occurs when franchisors add new units of their brand proximately to their franchisees existing units franchisees claim that their revenues have substantially decreased as a result of encroaching same brand entry the topic of encroachment has not only dominated franchisee association agendas and trade journal headlines but has also become a hot topic for politicians and policymakers yet until now evidence of encroachment has been strictly anecdotal this paper provides the first systematic evidence of encroachment using revenue data from the texas lodging industry in the 1990s i find that when franchisors approve new same brand units in the vicinity of incumbent units these new units cannibalize the incumbents revenues in contrast to the result for franchisors the addition of a new unit by company owned brands in the vicinity of same brand units is associated with an increase in the incumbents revenues this contrast suggests that encroaching behavior is caused by incentives that result from the governance form of franchising and is not simply an outcome that accompanies all expansion this finding informs theory on governance forms and exclusive territories implications for practitioners and policy are also discussed