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Outlet ownership in franchising systems: an agency based approach

Author

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  • Sudhindra Seshadri

    (Indian School of Business, Gachibowli, Hyderabad, India)

Abstract
Building on prior agency theoretic explanations of the franchisor-franchisee relationship, this paper introduces the franchise system manager in the traditional dyadic channel. This allows us to link the franchisors internal agency problems of providing incentives to managers to their external agency problems of acquiring and extracting rents from franchisees. I find preliminary empirical support for this approach in a structural equations model estimated on a franchise system data set. I then develop and analyze an agency-theoretic model with agency tradeoffs. An explicit rationale for mixed ownership in franchising emerges from the model, where the share of company owned outlets is endogenously determined as the tradeoff between franchisee rents and managerial compensation. Copyright © 2002 John Wiley & Sons, Ltd.

Suggested Citation

  • Sudhindra Seshadri, 2002. "Outlet ownership in franchising systems: an agency based approach," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 23(6), pages 355-369.
    • Handle: RePEc:wly:mgtdec:v:23:y:2002:i:6:p:355-369
    DOI: 10.1002/mde.1073
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    References listed on IDEAS

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    1. Brickley, James A. & Dark, Frederick H., 1987. "The choice of organizational form The case of franchising," Journal of Financial Economics, Elsevier, vol. 18(2), pages 401-420, June.
    2. Mick Carney & Eric Gedajlovic, 1991. "Vertical integration in Franchise systems: Agency theory and resource explanations," Strategic Management Journal, Wiley Blackwell, vol. 12(8), pages 607-629, November.
    3. Martin, Robert E, 1988. "Franchising and Risk Management," American Economic Review, American Economic Association, vol. 78(5), pages 954-968, December.
    4. Nancy T. Gallini & Nancy A. Lutz, 1991. "Dual Distribution in Franchising," Cowles Foundation Discussion Papers 973, Cowles Foundation for Research in Economics, Yale University.
    5. Lafontaine, Francine, 1993. "Contractual Arrangements as Signaling Devices: Evidence from Franchising," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 9(2), pages 256-289, October.
    6. Rubin, Paul H, 1978. "The Theory of the Firm and the Structure of the Franchise Contract," Journal of Law and Economics, University of Chicago Press, vol. 21(1), pages 223-233, April.
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    Cited by:

    1. William E. Gillis & Ellen McEwan & T. Russell Crook & Steven C. Michael, 2011. "Using Tournaments to Reduce Agency Problems: The Case of Franchising," Entrepreneurship Theory and Practice, , vol. 35(3), pages 427-447, May.
    2. Farhad Sadeh & Manish Kacker, 2018. "Quality signaling through ex-ante voluntary information disclosure in entrepreneurial networks: evidence from franchising," Small Business Economics, Springer, vol. 50(4), pages 729-748, April.
    3. Ubba Savita & Shruti Sharma, 2017. "Do Franchisor and Franchisee Really Perceive Alike? Evidence from Indian Education Sector," Global Business Review, International Management Institute, vol. 19(5), pages 1379-1395, October.

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