Relationship between Risk and Incentives in Franchise Contracting

35 Pages Posted: 22 Jun 2016

See all articles by Muriel Fadairo

Muriel Fadairo

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE)

Cintya Lanchimba

National Polytechnic School - National Polytechnic Institute

Josef Windsperger

University of Vienna

Date Written: November 30, 2015

Abstract

The relationship between risk and incentives in franchise contracting is still an unsolved issue in the literature. According to the standard principal-agent model, a trade-off emerges between the franchisee's protection against risk and incentive motivation. Contrary to this traditional view, we argue that the relationship between risk and incentives can be positive. In franchise contracting, this implies that the royalty rate decreases with risk. Using a unique panel dataset combining French franchise and financial data, we address this issue empirically and analyze the impact of a risk- and incentive-adjusted royalty rate on performance. The data support the hypothesis of a negative relationship between risk and the royalty rate, which contradicts the standard prediction of the agency theory. Furthermore, the estimation of random effect models provides evidence that chain performance increases with a risk- and incentive-adjusted royalty rate.

Keywords: Contractual design, Risk-incentives relationship, Royalty rate, Franchising

JEL Classification: M21, C12, L14

Suggested Citation

Fadairo, Muriel and Lanchimba, Cintya and Windsperger, Josef, Relationship between Risk and Incentives in Franchise Contracting (November 30, 2015). Available at SSRN: https://ssrn.com/abstract=2798190 or http://dx.doi.org/10.2139/ssrn.2798190

Muriel Fadairo

University of Lyon 2 - Groupe d'Analyse et de Théorie Economique (GATE) ( email )

93, chemin des Mouilles
Ecully, 69130
France

Cintya Lanchimba

National Polytechnic School - National Polytechnic Institute ( email )

Ladrón de Guevara E11 - 253
Quito, Pichincha
Ecuador

Josef Windsperger (Contact Author)

University of Vienna ( email )

Oskar-Morgenstern-Platz 1
Vienna, A1090
Austria

HOME PAGE: http://im.univie.ac.at

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
64
Abstract Views
462
rank
408,158
PlumX Metrics