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Title: Financial Constraints and Moral Hazard: The Case of Franchising

Author(s): Ying Fan, Kai-Uwe Kühn and Francine Lafontaine

Publication Date: November 2013

Keyword(s): collateralizable housing wealth, Contracting, empirical, entry, financial constraints, growth, incentives and principal-agent

Programme Area(s): Industrial Organization

Abstract: Financial constraints are an important impediment to the growth of small businesses. We study theoretically and empirically how the financial constraints of agents affect their decisions to exert effort, and, hence the organizational decisions and growth of principals, in the context of franchising. We find that a 30 percent decrease in average collateralizable housing wealth in a region delays chains' entry into franchising by 0.28 years on average, 9 percent of the average waiting time, and slows their growth by around 10 percent, leading to a 10 percent reduction in franchised chain employment.

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Bibliographic Reference

Fan, Y, Kühn, K and Lafontaine, F. 2013. 'Financial Constraints and Moral Hazard: The Case of Franchising'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9728