This paper explains the structure of decision rights in franchising networks using property rights theory. Property rights theory explains the allocation of decision rights based on the importance of intangible assets. We submit that franchisees' fraction of decision rights varies positively with the contractibility of local market assets and negatively with contractibility of system-specific assets. Further, franchisees' less contractible innovation assets impact decision rights allocations more than contractible operation assets. Hypotheses tested on data from German franchisors are largely supportive. We extend the franchise literature by arguing that the contractibility of local market assets impacts the allocation of decision rights, and that decision rights allocations change for decisions involving different areas of the value chain.The governance structure of franchise relationships consists of two major components: residual income rights and residual decision rights. Residual income rights refer to the royalties and initial fees that are used as incentives in the franchise relationship. In recent decades, a dominant research stream in franchising has focused on explaining royalties and initial fees (

This study develops and tests an extended transaction cost model to explain the structure of decision rights in franchising. Results show that the inclusion of trust in the transaction cost model supplements the transaction cost explanation of the allocation of decision rights in franchising. On the basis of the data from the German franchise sector, we found that environmental uncertainty has a negative effect on the allocation of decision rights to franchisees because the franchisor exercises more control over local outlet decisions when the local market environment is highly uncertain. Contrary to the traditional transaction cost view, we found that behavioral uncertainty has a positive effect on the allocation of decision rights to franchisees. This result implies that franchisors are more likely to delegate decision rights to franchisees when they encounter difficulties in measuring franchisees' performance and controlling their behavior. Finally, trust has a moderating effect on the relationship between transaction cost variables and franchisor's propensity to delegate decision rights to franchisees. Copyright © 2013 John Wiley & Sons, Ltd.

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