Optimal Monetary Provisions and Risk Aversion in Plural Form Franchise Networks A Model of Incentives with Heterogeneous Agents

Résumé 0

Existing literature on franchising has extensively studied the presence of plural form distribution networks, where two types of vertical relationships-integration versus franchising-co-exist. However, despite the importance of monetary provisions in franchise contracts, their definition in the case of plural form networks had not been addressed. In this paper, we focus more precisely on the " share parameters " in integrated (company-owned retail outlet) and decentralized (franchised outlet) vertical contracts, respectively the commission rate and the royalty rate. We develop an agency model of payment mechanism in a two-sided moral hazard context, with one principal and two heterogenous agents distinguished by different levels of risk aversion. We define the optimal monetary provisions, and demonstrate that even in the case of segmented markets, with no correlation between demand shocks, the two rates (commission rate, royalty rate) are negatively interrelated.