Entrepreneurial orientation, risk and incentives: the case of franchising

Cintya Lanchimba, Josef Windsperger () and Muriel Fadairo ()
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Josef Windsperger: University of Vienna
Muriel Fadairo: Univ Lyon, UJM Saint-Etienne, GATE Lyon Saint-Etienne, UMR 5824

Small Business Economics, 2018, vol. 50, issue 1, No 9, 163-180

Abstract: Abstract The standard principal-agent model predicts a trade-off in contract design between the protection against risk and incentive motivations. Distinguishing two types of risks, we show that, contrary to this traditional view, the relationship between risk and incentives can be positive. In franchise contracting, this implies that the royalty rate decreases with the risk faced by the franchisee on the local market. Using a unique panel dataset combining French franchise and financial data, we address this issue empirically, alongside performance outcomes. The data support the hypothesis of a negative relationship between risk and the royalty rate, which contradicts the prediction of the standard agency theory. Furthermore, our estimations provide evidence that chain performance increases with an adjusted royalty rate. This paper has important implications for contract design, showing that with increasing local market uncertainty and low-risk aversion, franchisors should reduce the royalty rate.

Keywords: Contractual design; Entrepreneurial orientation; Risk; Royalty rate; Moral hazard (search for similar items in EconPapers)
JEL-codes: L14 L26 M21 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s11187-017-9885-3

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