The Economics of Contracts: Theories and Applications

By Eric Brousseau; Jean-Michel Glachant | Go to book overview

18
Residual claims and self-enforcement as
incentive mechanisms in franchise
contracts: substitutes or complements?
Francine Lafontaine and Emmanuel Raynaud

1 Introduction

Franchising is a contractual relationship that has received a significant amount of attention in the empirical literature on contracting. In large part, this is because franchising is one of the few types of contractual relationships about which significant amounts of data are available from public sources. But franchising is also, as noted by Williamson (1991), a hybrid organizational form, which lies somewhere between complete vertical integration and spot markets. Thus insights gleaned from the study of franchise contracting have allowed researchers to develop a better understanding not only of this organizational form, but also of how firms organize their activities much more generally, both within and across firms.

Much of the literature on franchising has specifically been concerned with incentive issues and how these are managed in these contracts. This literature has identified two main categories of incentive mechanisms relevant to the franchise relationship: residual claims and self-enforcement. The former relates to the fact that franchisees get to keep their outlet's profits net of the fees they pay to their franchisors, giving them incentives to maximize those residual profits. The second relies on the presence of on-going rent at the outlet level, rent that the franchisee forgoes if his contract is terminated. Such rent is simply the difference between the (net present value of) returns that the franchisee earns as a result of being associated with the franchise network and the returns he could garner in his next best alternative. If the rent is positive, and franchisors can terminate franchisees, franchisees will have incentives to perform according to the standards set by the franchisor to reduce their chances of termination and protect their access to the rent.

In this chapter, we describe how these two types of incentive mechanisms work in theory and in practice in franchise contracting, and then explore the relationship between them. Our contention is that rather than being alternative approaches to aligning the incentives of contracting

-315-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited page

Bookmark this page
The Economics of Contracts: Theories and Applications
Table of contents

Table of contents

Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this book
  • Bookmarks
  • Highlights & Notes
  • Citations
/ 584

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.