Working Paper: CEPR ID: DP9728
Authors: Ying Fan; Kaiuwe Khn; Francine Lafontaine
Abstract: Financial constraints are an important impediment to the growth of small businesses. We study theoretically and empirically how the financial constraints of agents affect their decisions to exert effort, and, hence the organizational decisions and growth of principals, in the context of franchising. We find that a 30 percent decrease in average collateralizable housing wealth in a region delays chains' entry into franchising by 0.28 years on average, 9 percent of the average waiting time, and slows their growth by around 10 percent, leading to a 10 percent reduction in franchised chain employment.
Keywords: collateralizable housing wealth; contracting; empirical; entry; financial constraints; growth; incentives; principal-agent
JEL Codes: D22; D82; L14; L22; L8
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Collateralizable housing wealth (G51) | Franchisee effort (L14) |
| Franchisee effort (L14) | Franchisor growth decisions (F23) |
| Collateralizable housing wealth (G51) | Value of opening a franchised outlet (F23) |
| Value of opening a franchised outlet (F23) | Profitability for franchisors (L14) |
| Amount of capital required to open an outlet (G31) | Value of franchising (L14) |
| Interest rate (E43) | Value of franchising (L14) |
| Number of employees needed in the business + Collateralizable housing wealth (J23) | Value of franchising (L14) |
| 30% decrease in average collateralizable housing wealth (G51) | Delay in chains' entry into franchising (L14) |
| 30% decrease in average collateralizable housing wealth (G51) | Reduction in franchised chain employment (J63) |
| 30% decrease in collateralizable housing wealth (G51) | Jobs affected in the economy (A11) |