Incentive Conflicts and Contracting: Evidence from Franchising

Posted: 17 Apr 1998

See all articles by James A. Brickley

James A. Brickley

University of Rochester - Simon Business School

Date Written: November 1995

Abstract

This paper develops cross-sectional implications about the assignment of rights in franchise contracts. These implications are tested using a large sample of franchise agreements. The tests support the predictions and suggest that restrictive provisions (such as mandatory advertising, passive-ownership restrictions and area development plans) are used when title to unit profits provide insufficient incentives for optimal investment by the franchisee. The evidence also suggests that the incentive instruments used in franchise contracts are complements. While the study focuses on franchising, the results provide insights into related provisions in other contracts, such as the common restriction that an employee must report to work (even when the work could be performed at home). The evidence is also consistent with the hypothesis that vertical restraints are included in distribution contracts to help control horizontal free-rider problems.

JEL Classification: J41

Suggested Citation

Brickley, James A., Incentive Conflicts and Contracting: Evidence from Franchising (November 1995). Available at SSRN: https://ssrn.com/abstract=7470

James A. Brickley (Contact Author)

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-160L
Rochester, NY 14627
United States
585-275-3433 (Phone)
585-442-6323 (Fax)

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