Working Paper: NBER ID: w8868
Authors: Francine Lafontaine; Emmanuel Raynaud
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.
Keywords: franchising; incentive mechanisms; residual claims; self-enforcement
JEL Codes: L2; D2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| residual claims (G33) | greater effort from franchisees (L14) |
| self-enforcement mechanisms (P14) | prevent franchisees from maximizing own profits at the expense of the franchise system (L21) |
| residual claims + self-enforcement mechanisms (P14) | optimal contract design (D86) |
| greater effort from franchisees + self-enforcement (L14) | benefits for the franchise system (L14) |