The Role of Residual Claims and Self-Enforcement in Franchise Contracting

33 Pages Posted: 28 Mar 2002 Last revised: 27 Oct 2010

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

Emmanuel Raynaud

INRA SADAPT and Centre ATOM (U. of Paris I)

Date Written: March 2002

Abstract

Much of the economic literature on franchising has been concerned with incentive issues and how these are managed in franchised contracts. Two main types of incentive mechanisms have been identified: residual claims and self enforcement. In this paper we describe these incentive mechanisms, and their use in franchise contracts. We argue that although these two types of mechanisms are usually thought of as alternative ways to align franchisee and franchisor incentives, they are in fact complementary in franchise contracts because they address different incentive problems. We explore what these incentive problems are, and then describe specifically how franchise contract terms and practices support each type of incentive mechanism. Finally, we discuss briefly, via two examples, how our analysis also applies to non-franchised systems with common marks or other reputation concerns.

Suggested Citation

Lafontaine, Francine and Raynaud, Emmanuel, The Role of Residual Claims and Self-Enforcement in Franchise Contracting (March 2002). NBER Working Paper No. w8868. Available at SSRN: https://ssrn.com/abstract=305612

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

Emmanuel Raynaud

INRA SADAPT and Centre ATOM (U. of Paris I) ( email )

16 rue Claude Bernard
75231, Paris cedex 05
France

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