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Contractual relations and organizational structure in franchising

Empirical evidence from Germany

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Abstract

In this paper, we employ a new dataset based on a sample of 123 franchise systems originating from Germany to empirically test hypotheses stemming from agency theory and capital scarcity considerations on the contractual relations and the organizational structure in franchising. We include proxies for the franchisor’s capital scarcity as well as for moral hazard on the franchisee’s and the franchisor’s side. Furthermore, we distinguish between initial and ongoing franchisor support. Our results indicate that agency models based on double moral hazard do explain the design of franchise contracts and the organizational structure in terms of the proportion of franchised outlets. We find that the incentive component of the franchise contract (the royalty rate) is not influenced by moral hazard on the franchisee’s side, but rather by moral hazard on the franchisor’s side. Furthermore, the proportion franchised is strongly influenced by moral hazard on the franchisee’s side. Hence, after providing incentives to outlet managers by turning them into franchisees, thereby granting them residual claimancy, the royalty rate mainly serves to ensure ongoing franchisor input. The franchisor’s capital scarcity influences the fixed fee in franchise contracts and the proportion of franchised outlets, thus supporting standard capital scarcity arguments.

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Acknowledgements

We thank two anonymous referees, Oliver Fabel (the department editor), Jens Grunert, Daniel Gutknecht, Mirko Heinle, Christian Hofmann, Werner Neus, Andreas Walter, and participants of the X. Conference of the German Economic Association of Business Administration (GEABA) for helpful comments.

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Authors and Affiliations

  1. Lehrstuhl für Organisationstheorie, WHU – Otto Beisheim School of Management, Burgplatz 2, 56179, Vallendar, Germany

    Anna Rohlfing

  2. Abteilung Bankwirtschaft, Universität Tübingen, Mohlstraße 36, 72074, Tübingen, Germany

    Philipp Sturm

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  1. Anna Rohlfing
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  2. Philipp Sturm
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Correspondence to Anna Rohlfing.

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Rohlfing, A., Sturm, P. Contractual relations and organizational structure in franchising. Z Betriebswirtsch 81, 393–421 (2011). https://doi.org/10.1007/s11573-011-0446-y

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