Optimal Monetary Provisions and Risk Aversion in Plural Form Franchise Network. A Model of Incentives with Heterogeneous Agents

Muriel Fadairo (), Cyntia Lanchimba () and Miguel Yangari ()
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Muriel Fadairo: Université de Lyon, Lyon F- 69007, France; CNRS, GATE L-SE, Ecully, F- 69130, France; Université J. Monnet, Saint-Etienne, F- 42000, France
Cyntia Lanchimba: National Polytechnic School, Quito, Ecuador; Université de Lyon, Lyon F- 69007, France; CNRS, GATE L-SE, Ecully, F- 69130, France; Université J. Monnet, Saint-Etienne, F- 42000, France
Miguel Yangari: National Polytechnic School, Quito, Ecuador

No 1602, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

Abstract: Existing literature on franchising has extensively studied the presence of plural form distribution networks, where two types of vertical relationships - integration versus franchising - co-exist. However, despite the importance of monetary provisions in franchise contracts, their definition in the case of plural form networks had not been addressed. In this paper, we focus more precisely on the “share parameters” in integrated (company-owned retail outlet) and decentralized (franchised outlet) vertical contracts, respectively the commission rate and the royalty rate. We develop an agency model of payment mechanism in a two-sided moral hazard context, with one principal and two heterogenous agents distinguished by different levels of risk aversion. We define the optimal monetary provisions, and demonstrate that even in the case of segmented markets, with no correlation between demand shocks, the two rates (commission rate, royalty rate) are negatively interrelated.

Keywords: Franchising; dual distribution; royalty rate; commission rate; moral hazard (search for similar items in EconPapers)
JEL-codes: D82 L14 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-com, nep-hrm, nep-mon, nep-net and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:gat:wpaper:1602

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