Having it their way? The franchising decision and the structure of franchise contracts

"This dissertation empirically investigates organizational choice decisions in the franchising arena. Two central questions are explored. First, what explains the existing variation in system ownership mix—i.e., what factors determine whether a particular unit will be company-owned or franchised? And second, what explains the diversity of existing franchise agreements—i.e., what factors influence the specific contractual terms adopted by individual franchise systems? The main finding of this empirical study can be stated quite succinctly—organizational choice decisions turn on economizing considerations. Specifically, the essays of this dissertation advance the argument that the particular units to be franchised as well as the specific terms of the franchise agreement will be selected to: (1) support high-powered outlet-level incentives and/or reduce outlet-level monitoring costs; (2) protect against free-riding and the degradation of the brand name; and (3) be prospectively remunerative (cost recovering) for both the franchisee and the franchisor. This dissertation is comprised of five Chapters. Chapter One provides an overview of the franchising phenomenon highlighting both the economic significance and the political contentiousness of this form. Chapter Two reviews and critiques the extant empirical franchising make-or-buy literature. Employing a unique set of data drawn directly from a sample of franchise disclosure documents, Chapter Three then presents and tests a more complete model of this organizational choice decision. The study extends the existing literature by (1) simultaneously accounting for both pertinent contractual hazards—shirking and free-riding—that underlie the central economizing trade-off, and (2) focusing the analysis at the unit-level to investigate within-system organizational choice—the likelihood that a particular unit will be organized as a single-unit franchise, as part of a multi-unit franchise, or as a company-owned outlet. Chapter Four provides one of the first empirical investigations into the adoption of non-payment related, as well as payment-related, contract terms in the franchising agreement. The findings of this chapter—that the adoption of specific contract terms follow an economizing logic—informs the ongoing franchise relationship law debates and indicates that legislative intervention may not be warranted. Chapter Five summarizes findings, discusses public policy implications, and sets forth plans for future research."