Contractual Relations and Organizational Structure in Franchising – Empirical Evidence from Germany

Zeitschrift für Betriebswirtschaft, Vol. 81, No. 4, pp. 393-421

27 Pages Posted: 10 Aug 2009 Last revised: 5 May 2011

See all articles by Anna Rohlfing-Bastian

Anna Rohlfing-Bastian

Goethe University Frankfurt

Philipp Sturm

University of Tuebingen

Date Written: August 7, 2009

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.

Keywords: Franchising, Double Moral Hazard, Incentive Contracts, Capital Scarcity

JEL Classification: L14, L22, M55

Suggested Citation

Rohlfing-Bastian, Anna and Sturm, Philipp, Contractual Relations and Organizational Structure in Franchising – Empirical Evidence from Germany (August 7, 2009). Zeitschrift für Betriebswirtschaft, Vol. 81, No. 4, pp. 393-421, Available at SSRN: https://ssrn.com/abstract=1445408

Anna Rohlfing-Bastian (Contact Author)

Goethe University Frankfurt

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60629
Germany

Philipp Sturm

University of Tuebingen ( email )

Mohlstraße. 36
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

HOME PAGE: http://www.wiwi.uni-tuebingen.de/cms/

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