Complementarities and Substitutabilities in Franchise Contracting: Some Results from the German Franchise Sector

According to the property rights approach,decision rights have to be allocated accordingto the distribution of intangible knowledge assetsbetween the franchisor and franchisee andownership rights have to be assigned according to theresidual rights of control (residual decisionrights). Since residual income rights are diluted infranchising relationships, ownership rightsinclude not only residual income rights (initial fees androyalties) but also complementary ownershipsurrogates to simulate the motivation effect of undilutedownership rights. Therefore, under a propertyrights perspective, an efficient contract structure infranchise relationships implies co-locationbetween knowledge assets and decision rights andcomplementarity between residual decision andownership rights. The more important the franchisor's(franchisee's) system-specific assets (localmarket knowhow) for the generation of residual surplus, themore decision and complementary ownership rightsshould be transferred to the franchisor(franchisee). Three hypotheses were derivedfrom the property rights approach and tested in the Germanfranchise sector. The empirical results arepartly supportive of the hypotheses. Copyright Kluwer Academic Publishers 2003