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Up-front Franchise Fees and Ongoing Variable Payments as Substitutes: An Agency Perspective

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  • Luis Vázquez

Abstract

This article provides evidence on the determinants of the compensation arrangements used in franchise relationships. While the empirical literature has studied two of these compensation arrangements – the royalty rate and the up-front franchise fee – this work expands the analysis to another important source of revenues for franchisors: the sales of inputs to franchisees at prices greater than marginal costs. Consistent with predictions suggested by agency theory, the compensation arrangements studied appear to function as substitutes. The results also reveal that the value of the services provided by franchisors to franchisees strongly affects the compensation arrangements studied, so a capital goal of these arrangements is to recover the costs of the services offered by franchisors. Copyright Springer 2005

Suggested Citation

  • Luis Vázquez, 2005. "Up-front Franchise Fees and Ongoing Variable Payments as Substitutes: An Agency Perspective," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 26(4), pages 445-460, June.
    • Handle: RePEc:kap:revind:v:26:y:2005:i:4:p:445-460
    DOI: 10.1007/s11151-005-0983-z
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    References listed on IDEAS

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    1. Susan Athey & Scott Stern, 1998. "An Empirical Framework for Testing Theories About Complimentarity in Organizational Design," NBER Working Papers 6600, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Maruyama, Masayoshi & Yamashita, Yu, 2014. "Revenue versus incentive: Theory and empirical analysis of franchise royalties," Journal of the Japanese and International Economies, Elsevier, vol. 34(C), pages 154-161.
    2. Ivan Kotliarov, 2011. "Royalty Rate Structure in Case of Franchising," Annals of Economics and Finance, Society for AEF, vol. 12(1), pages 139-156, May.
    3. Lanchimba, Cintya & Welsh, Dianne H.B. & Fadairo, Muriel & Silva, Vivian-Lara D.S., 2021. "The impact of franchisor signaling on entrepreneurship in emerging markets," Journal of Business Research, Elsevier, vol. 131(C), pages 337-348.
    4. Cintya Lanchimba & Josef Windsperger & Muriel Fadairo, 2018. "Entrepreneurial orientation, risk and incentives: the case of franchising," Small Business Economics, Springer, vol. 50(1), pages 163-180, January.
    5. Cintya Lanchimba, 2013. "Optimal Monetary Provisions in Plural Form Franchise Systems ; A Theoretical Model of Incentives with Two Risk-Averse Agents," Working Papers 1321, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    6. Maruyama, Masayoshi & Yamashita, Yu, 2010. "The logic of franchise contracts: Empirical results of Japan," Japan and the World Economy, Elsevier, vol. 22(3), pages 183-192, August.
    7. Muriel Fadairo & Cyntia Lanchimba & Miguel Yangari, 2016. "Optimal Monetary Provisions and Risk Aversion in Plural Form Franchise Network. A Model of Incentives with Heterogeneous Agents," Working Papers 1602, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    8. Hidetoshi Shiroishi & Tomokazu Kubo, 2012. "Non-contractibility and Market Uncertainty in Franchise Systems," Keio/Kyoto Joint Global COE Discussion Paper Series 2012-023, Keio/Kyoto Joint Global COE Program.
    9. Muriel Fadairo & Cintya Lanchimba & Miguel Yangari, 2016. "Optimal Monetary Provisions and Risk Aversion in Plural Form Franchise Networks A Model of Incentives with Heterogeneous Agents," Working Papers halshs-01251344, HAL.
    10. Muriel Fadairo & Cintya Lanchimba, 2012. "Performance in distribution systems : What is the influence of the upstream firm's organizational choices ?," Working Papers halshs-00727382, HAL.
    11. Matej Lahovnik Edith Bečić Steiner, 2019. "Organization in New Business Environment: a Franchisor’s View," Zagreb International Review of Economics and Business, Faculty of Economics and Business, University of Zagreb, vol. 22(SCI), pages 83-94, March.
    12. Masayoshi Maruyama & Yu Yamashita, 2012. "Franchise Fees and Royalties: Theory and Empirical Results," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 40(3), pages 167-189, May.
    13. Muriel Fadairo & Cintya Lanchimba Lopez, 2012. "Performance in distribution systems : What is the influence of the upstream firm’s organizational choices ?," Working Papers 1224, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.

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