An Incomplete Contracting Model of Governance Structure Variety in Franchising

George Hendrikse and Tao Jiang

ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam

Abstract: For the purpose of explaining governance structure variety in franchising, we explore the impact of governance structure on the incentives to invest in specific assets for the franchisor as well as the distributors. Wholly-owned, wholly-franchised, and mixed (dual distribution) franchise systems are considered. Circumstances are identified when a dual distribution governance structure uniquely allocates efficient ownership over assets. Whether dual distribution benefits are realized in a franchise or a cooperative franchise depends on whether most value is added upstream or downstream. A disadvantage of a dual distribution system is the deterioration of the investment incentives of the party having no authority, i.e. either the company-owned outlet manager in a traditional franchise or the franchisor in a cooperative franchise. A wholly-franchised system may therefore be efficient even when unique dual distribution benefits are present. A necessary condition for the efficiency of a dual distribution governance structure is a positive systemic effect, not the value of the brand name or location (or other) differences between outlets.

Keywords: Dual distribution; Franchising; Governance; Incomplete contracting (search for similar items in EconPapers)
JEL-codes: L81 M M13 O32 (search for similar items in EconPapers)
Date: 2007-08-21
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://repub.eur.nl/pub/10462/ERS-2007-049-ORG.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:ems:eureri:10462

Access Statistics for this paper

More papers in ERIM Report Series Research in Management from Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam Contact information at EDIRC.
Bibliographic data for series maintained by RePub ( this e-mail address is bad, please contact ).