Ownership, Agency, and Wages: An Examination of Franchising in the Fast Food Industry

By Krueger, Alan B. | Quarterly Journal of Business and Economics, February 1991 | Go to article overview

Ownership, Agency, and Wages: An Examination of Franchising in the Fast Food Industry


Krueger, Alan B., Quarterly Journal of Business and Economics


A topic of controversy among economists in recent years has been whether firms adjust the level and timing of compensation to solve incentive problems. Becker and Stigler |1974~, Lazear |1981~, and others have argued that firms initially pay wages below the workers' alternative wage and later pay wages above the alternative wage to discourage shirking when monitoring is imperfect. Such a delayed-payment/bonding contract is efficient because it does not alter the present value of compensation from the first-best, full-information level. If legal or other constraints (e.g., the minimum wage) restrict up-front bonds, however, a related literature predicts that firms will pay efficiency wages.(1) An efficiency wage payment differs from a delayed-payment/bonding contract in that firms raise the present value of compensation to increase the cost of job loss and thereby discourage shirking, although compensation may also be backloaded in the efficiency wage model.

Whether firms overcome monitoring deficiencies by having workers post implicit bonds or by paying efficiency wages--or whether imperfect monitoring and shirking are indeed concerns of many firms--are questions that can only be resolved empirically.

Unfortunately, little empirical work exists exploring how firms respond to imperfect monitoring and agency problems.(2) This paper examines the labor market in the fast food industry to estimate the effect of agency problems on the structure of compensation. The institutional features of the fast food industry provide unique conditions for studying wage determination. The fast food industry is competitive, homogeneous, and nonunion. But most importantly, the fact that some restaurant outlets are owned and operated by the parent company, while others are owned and operated by individual franchisees generates variability in organizational structure that allows for a test of theories of wage determination.

It is argued that existing contractual arrangements give managers of company-owned restaurants different incentives from franchisees who typically own and manage their own restaurants. An owner-manager of a franchise has a strong incentive to expend effort supervising and monitoring his workers because he receives the residual profit generated by the enterprise; whereas a manager of a company-owned establishment is usually not paid a share of the establishment's profit, and his actions are not perfectly observed by his principal, the parent company. As Caves and Murphy |1976, p. 575~ and others have noted, the latter contractual arrangement poses a classic principal-agent problem that is likely to reduce the level of supervision and monitoring in company-owned units vis-a-vis franchised units. Some casual evidence is presented in the next section supporting the maintained assumption that principal-agent problems create monitoring and supervision difficulties in company-owned outlets.

Under the assumption that monitoring is less rigorous at company-owned outlets than at franchisee-owned outlets, the delayed-compensation model would predict that the tenure-earnings profile of workers is steeper at company-owned outlets, but total discounted compensation is equal under either form of ownership. The efficiency wage model, on the other hand, would predict that both the slope of the tenure-earnings profile and the present value of compensation are greater at company-owned outlets. Finally, the standard neoclassical model would predict no difference in the timing or level of compensation at company-owned and franchised outlets because employee effort is assumed to be exogenously determined. Two newly available cross-sectional data sets are used to test these predictions.

The main empirical finding is that low-level managers earn 9 percent higher wages at company-owned outlets than at franchised outlets, whereas crew workers earn 1 to 2 percent more at company-owned outlets. Moreover, the earnings differences result almost entirely from comparatively steeper tenure-earnings profiles at company-owned outlets. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

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 article

Cited article

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 article

Ownership, Agency, and Wages: An Examination of Franchising in the Fast Food Industry
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

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 article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

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.