Preliminary evidence on the appointment of institutional solutions to franchisor moral hazard-the case of franchisee councils

Olivier Cochet and Thomas Ehrmann
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Olivier Cochet: Westfälische Wilhelms-Universität Münster, Department of Strategic Management, Münster, Germany, Postal: Westfälische Wilhelms-Universität Münster, Department of Strategic Management, Münster, Germany
Thomas Ehrmann: Westfälische Wilhelms-Universität Münster, Department of Strategic Management, Münster, Germany, Postal: Westfälische Wilhelms-Universität Münster, Department of Strategic Management, Münster, Germany

Managerial and Decision Economics, 2007, vol. 28, issue 1, pages 41-55

Abstract: Besides franchisee opportunistic behavior, franchisor moral hazard is a central concern in franchise chains. Economic literature thus far focused on the sharing of franchisee revenues as an incentive for curbing franchisor malfeasance. In this paper, we ask whether and how the obligations of chains may be enforced through institutional arrangements like franchisee councils. Consistent with expectations, the appointment of a council empirically turned out to be more likely as decision rights-a proxy for the scope of moral hazard-were increasingly allocated to companies' management. We found this relationship to be negatively moderated by the contractual share parameter. Copyright © 2007 John Wiley & Sons, Ltd.

Date: 2007
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