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Outlet ownership in franchising systems: an agency based approach
Author(s) -
Seshadri Sudhindra
Publication year - 2002
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.1073
Subject(s) - economic rent , agency (philosophy) , franchise , principal–agent problem , incentive , microeconomics , business , industrial organization , compensation (psychology) , agency cost , set (abstract data type) , economics , marketing , finance , computer science , shareholder , psychology , corporate governance , philosophy , epistemology , psychoanalysis , programming language
Building on prior agency theoretic explanations of the franchisor–franchisee relationship, this paper introduces the franchise system manager in the traditional dyadic channel. This allows us to link the franchisors internal agency problems of providing incentives to managers to their external agency problems of acquiring and extracting rents from franchisees. I find preliminary empirical support for this approach in a structural equations model estimated on a franchise system data set. I then develop and analyze an agency‐theoretic model with agency tradeoffs. An explicit rationale for mixed ownership in franchising emerges from the model, where the share of company owned outlets is endogenously determined as the tradeoff between franchisee rents and managerial compensation. Copyright © 2002 John Wiley & Sons, Ltd.