The Dynamics of Franchise Contracting: Evidence from Panel Data

45 Pages Posted: 26 Jun 2000 Last revised: 25 Mar 2008

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)

Multiple version iconThere are 2 versions of this paper

Date Written: May 1996

Abstract

In this paper, we model the determinants of franchise contract terms, namely royalty rates and franchise fees, using a unique panel data set of about 1000 franchisors for the period 1980-1992. We focus on the extent to which firms adjust the terms of their contracts as they become better established, and find that adjustment is relatively infrequent and that firms do not systematically raise or lower their royalty rates or franchise fees when they do adjust them. These results tend to refute a number of existing theories of franchising that are based on risk-sharing, asymmetric information, and certain incentive structures, but support those based on franchisor opportunism and to some extent double-sided moral hazard. Our results also suggest that when industrial organization economists do not have access to panel data, their work may well suffer from the omitted variable bias caused by unobserved firm effects.

Suggested Citation

Lafontaine, Francine and Shaw, Kathryn L., The Dynamics of Franchise Contracting: Evidence from Panel Data (May 1996). NBER Working Paper No. w5585. Available at SSRN: https://ssrn.com/abstract=225534

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
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734-647-4915 (Phone)
734-936-0279 (Fax)

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

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Kathryn L. Shaw

Stanford Graduate School of Business ( email )

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Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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