Revenue versus incentive: Theory and empirical analysis of franchise royalties

Masayoshi Maruyama and Yu Yamashita

Journal of the Japanese and International Economies, 2014, vol. 34, issue C, 154-161

Abstract: This paper analyzes royalty rates in franchise contracts, focusing on the two leading hypotheses. We consider whether royalty payments are simply the means for franchisors to acquire revenue from franchisees (revenue hypothesis), or are to preserve incentives for the franchisors to exert appropriate efforts (incentive hypothesis). We propose a new variant of the revenue hypothesis, which is derived from an elementary model of franchise contracts with input sales. We hypothesize that the royalty rate is higher when the total margin ratio of the franchise chain is higher (when the sales revenue ratio is lower). We use OLS to explore data on 118 Japanese franchise chains in 2001 and find evidence supporting this hypothesis, which provides an explanation for higher royalty rates for service-type franchises.

Keywords: Franchising; Royalties; Service; Empirical study (search for similar items in EconPapers)
JEL-codes: L14 L22 L81 M21 M31 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jjieco:v:34:y:2014:i:c:p:154-161

DOI: 10.1016/j.jjie.2014.06.002

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