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Small Business Economics

, Volume 50, Issue 1, pp 163–180 | Cite as

Entrepreneurial orientation, risk and incentives: the case of franchising

  • Cintya Lanchimba
  • Josef Windsperger
  • Muriel Fadairo
Article

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 

JEL Classification

L26 L14 M21 

Supplementary material

11187_2017_9885_MOESM1_ESM.pdf (146 kb)
ESM 1 (PDF 145 kb)

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Copyright information

© Springer Science+Business Media New York 2017

Authors and Affiliations

  • Cintya Lanchimba
    • 1
  • Josef Windsperger
    • 3
  • Muriel Fadairo
    • 2
  1. 1.Escuela Politécnica NacionalQuitoEcuador
  2. 2.Univ Lyon, UJM Saint-Etienne, GATE Lyon Saint-Etienne, UMR 5824Saint- EtienneFrance
  3. 3.Austria, Faculty of Business, Economics and StatisticsUniversity of ViennaViennaAustria

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