The Factors of Revenue-Sharing Contracts in Franchising: Evidence from the Korean Franchise Industry

Abstract

I examine whether the existing theories on revenue-sharing contracts can explain variations in the terms of franchise contracts, including royalty rates, the degree of revenue-sharing, and the mix of franchising and company ownership (contract-mixing), in the Korean franchise industry. This study utilizes a unique dataset that I assembled on 300 franchise systems in the franchised restaurant industry in Korea. I find the capital constraint-based explanation is more consistent in explaining the franchise fee, whereas the moral hazard-based explanation is more consistent in explaining the royalty rate. Also, the contract length is found one of the most significant explanatory variables. These findings confirm the role of revenue-sharing as a tool to align the contracting parties' incentives and suggest it be a commitment device to a continued collaborative partnership between franchisors and franchisees.