Abstract
A franchising contract relocates distributable rent between franchisor and franchisee. With decentralized wage bargaining relocation modifies the position of the union in the wage bargaining. If the rent is relocated to the franchisor completely, then even a strong union is not able to raise wage above reservation level in the franchisee's firm. If franchisor and franchisee negotiate on rent division, there is an incentive to increase the franchise fee at the expense of the union. Therefore the overall rent assigned to labor depends on the differences of labor intensity in the franchisor's and franchisee's firms. Firm owners may be able to transfer distributable rents from a firm with a strong union to one with a weak union. Furthermore, a franchising contract shows a first mover advantage. A franchising contract is placed before wage bargaining, benefiting the franchisor.
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Grandner, T. A Note on Franchising and Wage Bargaining. J Econ 87, 281–293 (2006). https://doi.org/10.1007/s00712-006-0178-6
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DOI: https://doi.org/10.1007/s00712-006-0178-6