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Up-front Franchise Fees and Ongoing Variable Payments as Substitutes: An Agency Perspective

LUIS VÁZQUEZ
Review of Industrial Organization
Vol. 26, No. 4 (June 2005), pp. 445-460
Published by: Springer
Stable URL: http://www.jstor.org/stable/41799245
Page Count: 16
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Up-front Franchise Fees and Ongoing Variable Payments as Substitutes: An Agency Perspective
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Abstract

This article provides evidence on the determinants of the compensation arrangements used in franchise relationships. While the empirical literature has studied two of these compensation arrangements - the royalty rate and the up-front franchise fee - this work expands the analysis to another important source of revenues for franchisors: the sales of inputs to franchisees at prices greater than marginal costs. Consistent with predictions suggested by agency theory, the compensation arrangements studied appear to function as substitutes. The results also reveal that the value of the services provided by franchisors to franchisees strongly affects the compensation arrangements studied, so a capital goal of these arrangements is to recover the costs of the services offered by franchisors.

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