Autonomy, Contractibility and the Franchise Relationship

Shira B. Lewin-Solomons

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Franchises are peculiar in two ways: first, the authority of franchisees is largely informal rather than formal. The efficiency of franchises is often attributed to their initiative and autonomy. Yet, in franchise contracts, franchisees agree to submit to the sometimes arbitrary will of the chain. Second, a franchisee pays her chain a royalty based on revenues that are not depended on costs, despite such an arrangement creating distorted incentives for the chain. Why? One possible answer is the noncontrability of costs. Yet costs are contracted on in many economic relationships, so why not in this institution? This paper attempts to answer this question by relating the royalty scheme to the existence of informal authority. Although costs in theory might be contractible, in reality contractibility would require the gathering of information that would create incentives for a chain to interfere with franchisee actions, thus undermining innovative behaviour and reducing efficiency.

Keywords: franchising; innovation; organisations; contractibility; incentives (search for similar items in EconPapers)
JEL-codes: D2 L2 M4 (search for similar items in EconPapers)
Date: 2000-11
Note: IO
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://files.econ.cam.ac.uk/repec/cam/pdf/wp0016.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:0016

Access Statistics for this paper

More papers in Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge
Bibliographic data for series maintained by Jake Dyer ().