Financial Constraints and Moral Hazard: The Case of Franchising
46 Pages Posted: 1 Nov 2013 Last revised: 10 Dec 2013
Date Written: October 28, 2013
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: Suggested Citation