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The Effect of Franchising on Establishment Performance in the U.S. Restaurant Industry

24 Pages Posted: 15 Dec 2016 Last revised: 19 Dec 2017

Matthew Sveum

University of Missouri - Department of Agricultural and Applied Economics

Michael E. Sykuta

University of Missouri at Columbia - Contracting and Organizations Research Institute (CORI); University of Missouri at Columbia - Division of Applied Social Sciences

Date Written: December 15, 2017

Abstract

A central theme in much of the franchising literature is that franchising mitigates the principle-agent problems between the owner of the franchise company and the operator of the local establishment by making the operator the owner-franchisee of the establishment. Despite the centrality of that assumption in the literature, there is little empirical evidence to support it. We use Census of Retail Trade data for essentially all full- and limited-service restaurants in the US to test whether franchisee ownership affects performance at the establishment level. We find a strong and robust franchise effect for full-service restaurants, but little effect among limited-service restaurants. We argue this difference is consistent with agency costs given differences in work processes and the important of managerial discretion.

Keywords: Franchising, restaurants, data envelopment analysis, efficiency

JEL Classification: D23, D24, L83

Suggested Citation

Sveum, Matthew and Sykuta, Michael E., The Effect of Franchising on Establishment Performance in the U.S. Restaurant Industry (December 15, 2017). Cornell Hospitality Quarterly (Forthcoming); US Census Bureau Center for Economic Studies Paper No. CES-WP- 16-54. Available at SSRN: https://ssrn.com/abstract=2883267 or http://dx.doi.org/10.2139/ssrn.2883267

Matthew Sveum (Contact Author)

University of Missouri - Department of Agricultural and Applied Economics ( email )

Mumford Hall
Columbia, MO 65211
United States

Michael E. Sykuta

University of Missouri at Columbia - Contracting and Organizations Research Institute (CORI) ( email )

135 Mumford Hall
Columbia, MO 65211
United States
573-882-1738 (Phone)

HOME PAGE: http://cori.missouri.edu

University of Missouri at Columbia - Division of Applied Social Sciences ( email )

135 Mumford Hall
Columbia, MO 65211
United States

HOME PAGE: http://michaelsykuta.com

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