The Dynamics of Franchise Contracting: Evidence from Panel Data

Posted: 26 Oct 1999 Last revised: 6 Jun 2013

See all articles by Francine Lafontaine

Francine Lafontaine

University of Michigan at Ann Arbor - Stephen M. Ross School of Business; University of Michigan at Ann Arbor - Department of Economics

Kathryn L. Shaw

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

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Abstract

This paper provides the first systematic evidence on how franchisors adjust their royalty rates and franchise fees as they gain franchising experience. This evidence comes from a unique panel data set that we assembled on these monetary contract terms for about 1,000 franchisors each year for the 1980-92 period. We find that there is much persistence, over time, in franchise contract terms within firms. We find this despite sizable across-firm differences in royalty rates and franchise fees. In addition, franchisors do not systematically increase or decrease their royalty rates or franchise fees as they become better established, contrary to predictions from some specific theoretical models. We conclude that variation in contract terms is mostly determined by differences across firms, not by within-firm changes over time. Finally, we find no negative relationship, within firms, between up-front franchise fees and royalty rates.

JEL Classification: L11, L22

Suggested Citation

Lafontaine, Francine and Shaw, Kathryn L., The Dynamics of Franchise Contracting: Evidence from Panel Data. Journal of Political Economy, Vol. 107, No. 5, October 1999. Available at SSRN: https://ssrn.com/abstract=184520

Francine Lafontaine (Contact Author)

University of Michigan at Ann Arbor - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109-1234
United States
734-647-4915 (Phone)
734-936-0279 (Fax)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

Kathryn L. Shaw

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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