Financial Constraints and Moral Hazard: The Case of Franchising

Ying Fan, Kai-Uwe Kuhn, Francine Lafontaine

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Abstract

Financial constraints are considered an important impediment to growth for small businesses. We study theoretically and empirically the relationship between the financial constraints of agents and 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 an area is associated with a delay in chains’ entry into franchising by 0.33 years on average, or 10 percent of the average waiting time, and a reduction in chain growth and hence a reduction in franchised chain employment of about 9 percent.
Original languageEnglish
Pages (from-to)2082-2125
JournalJournal of Political Economy
Volume125
Issue number6
Early online date4 Aug 2017
DOIs
Publication statusPublished - Dec 2017

Keywords

  • Contracting
  • incentives
  • principal-agent
  • empirical
  • collateralizable housing wealth
  • entry
  • growth

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