Financial Constraints and Moral Hazard: The Case of Franchising

46 Pages Posted: 1 Nov 2013 Last revised: 10 Dec 2013

See all articles by Ying Fan

Ying Fan

University of Michigan

Kai-Uwe Kuhn

University of East Anglia (UEA) - Centre for Competition Policy; Centre for Economic Policy Research (CEPR)

Francine Lafontaine

University of Michigan at Ann Arbor - Stephen M. Ross School of Business; University of Michigan at Ann Arbor - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: October 28, 2013

Abstract

Financial constraints are an important impediment to the growth of small businesses. We study theoretically and empirically how the financial constraints of agents affect their decisions to exert effort, and, hence the organizational decisions and growth of principals, in the context of franchising. We find that a 30 percent decrease in average collateralizable housing wealth in a region delays chains' entry into franchising by 0.28 years on average, 9 percent of the average waiting time, and slows their growth by around 10 percent, leading to a 10 percent reduction in franchised chain employment.

Keywords: Contracting, incentives, principal-agent, empirical, financial constraints, collateralizable housing wealth, entry, growth

JEL Classification: L14, L22, D22, D82, L8

Suggested Citation

Fan, Ying and Kuhn, Kai-Uwe and Lafontaine, Francine, Financial Constraints and Moral Hazard: The Case of Franchising (October 28, 2013). Ross School of Business Paper No. 1212, Available at SSRN: https://ssrn.com/abstract=2347731 or http://dx.doi.org/10.2139/ssrn.2347731

Ying Fan

University of Michigan ( email )

611 Tappan Street
Lorch Hall, Rm 308
Ann Arbor, MI 48109-1220
United States

HOME PAGE: http://www-personal.umich.edu/~yingfan/

Kai-Uwe Kuhn (Contact Author)

University of East Anglia (UEA) - Centre for Competition Policy ( email )

UEA
Norwich Research Park
Norwich, Norfolk NR47TJ
United Kingdom

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Francine Lafontaine

University of Michigan at Ann Arbor - Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109-1234
United States
734-647-4915 (Phone)
734-936-0279 (Fax)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States

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