Using Tournaments to Reduce Agency Problems: The Case of Franchising

Abstract

Anecdotal evidence suggests that franchisors use multiunit franchising to reward franchisees. In this paper, we model multiunit franchising as the reward in a tournament-one solution to the franchising agency problem. We use a unique database of 68 restaurant franchisors and find support for the tournament model. Franchisors that seek franchisees with managerial experience and franchisors that build routines to share knowledge use more multiunit franchising. Also, franchisors that grow faster use more multiunit franchising than franchisors that grow more slowly, suggesting that faster-growing franchisors use multiunit franchising as a reward in a tournament to reduce agency problems.Organizations that use franchising are now a central part of the U.S. economy. As of 2005, there were more than 909,000 franchise establishments in the United States, and these establishments provided more than 11 million jobs and an output of more than $880 billion (International Franchise Association [IFA], 2009;Shay, 2009). Franchising is also growing across the globe. According to the IFA, 61% of its members operate internationally, 16% depend on international revenue for 25-30% of their total revenue, and 75% of its membership plans to begin or increase franchising operations overseas. In the most prominent industry using franchising, the U.S. quick-service (or "fast-food") industry, there are now more than 167,000 franchises, which account for more than 3 million jobs, payroll of $34.2 billion, and sales of $152.1 billion (IFA). For innovators and entrepreneurs in the service sector, franchising is a crucial strategy for accessing and assembling resources for growth.In a franchise chain, one entrepreneur, the franchisor, develops a production technology and a trademark and licenses the right to use that technology and trademark to a local Please send correspondence to: William

Antecedents of early terminations in franchising: franchisor versus franchisee cancelations

“…In keeping with an appropriate recruitment, empirical evidence (outside franchising) shows that prior management experience may also be a strong factor in entrepreneurial success. Hence, franchisors interested in franchisee entrepreneurial traits may demand this experience to applicants (Gillis et al 2011). Furthermore, the requirement of prior experience may deter low-quality franchisees from misrepresenting their abilities when searching for rents (Shane 1998 Weaven et al (2010) found that the franchisees who did not appraise the franchise business concept accurately or had not objectively estimated their own capacity were more likely to take for granted unrealistic expectations of their performance.…”

Evolution in franchising: Trends and new perspectives

“…which states franchising as part of a life cycle, where this system is adopted by firms to overcome scarce resources in their effort to growth, reverting in the future toward company ownership (Gillis et al, 2011). Oxenfeldt and Kelly were the first to formulate the termed resource scarcity view, which asserts that a nascent firm builds a brand in order to create economies of scale in advertising and purchasing (J. G. Combs et al, 2010;Oxenfeldt & Kelly, 1969).…”

“…These issues are investigated on the lenses of many perspectives, but five of them are the most prevalent (Dant et al, 2011) -resource acquisition theory (Oxenfeldt & Kelly, 1969), agency theory (Fama & Jensen, 1983a, 1983b, transaction cost analysis (WILLIAMSON, 1985), signaling Theory (Gallini & Lutz, 1992;Gallini & Wright, 1990) and property rights theory (Demsetz, 1966;Hart & Moore, 1990;Maness, 1996) -although scholars have been using many other theoretical perspective approaches as well -stakeholder theory (D. Altinay & Miles, 2006), tournament theory (James G. Combs, Ketchen Jr, & Short, 2011;Gillis, McEwan, Crook, & Michael, 2011) , institutional theory (D. Altinay & Miles, 2006), RBV (Barthélemy, 2008;Fladmoe-Lindquist, 1996), upper echelons theory (J. G. , learning theory (J. G. Combs, Ketchen, Shook, & Short, 2010); plural theory (Dant & Kaufmann, 2003), risk-sharing theory (Hsu, Jang, & Canter, 2010), social exchange theory (James G. Combs et al, 2011), resource dependence theory (Dant & Gundlach, 1999), among other perspectives.…”

Transcending paradox in the realm of South African executive pay

“…Tournaments have been used to explain many structures, from the obvious application to sporting tournaments (e.g. Bothner, Kang & Stuart 2007) to situations as diverse as innovation contests (Boudreau, Lacetera & Lakhani 2011), competition between broilerchicken farmers to gain sales to large buyers (Knoeber & Thurman 1994), multiunit franchising (Gillis et al 2011) and many others.…”