Plural Form in Franchising: An Incomplete Contracting Approach

Abstract:     
Plural form franchising is modeled from an incomplete contracting perspective. Complete franchising is the unique, efficient governance structure only when the plural form externality is limited and the costs of investment are low for both franchisees. Governance structure choice is irrelevant when the costs of investment are high for all franchisees, because no franchisee will invest. Finally, a plural form governance structure is the unique, efficient equilibrium in all other cases because the power allocated to independent franchisees makes them confident that they will be able to recoup their investments. Not locational or other differences between units are necessary for the emergence of plural form franchising, but positive externalities being specific for the plural form.

Number of Pages in PDF File: 26

Keywords: Incomplete Contracting, Franchising, Plural Form

JEL Classification: M, M10, L2, M12, M55

working papers series