An investigation of contractual arrangements within the firm : the 'vertical integration-franchising' mix
This thesis analyses the adoption of a mix of franchised and company-owned outlets among firms, namely, contractual heterogeneity within the firm. Contractual heterogeneity is explained by the existing literature as due to heterogeneous characteristics of the downstream outlets of a company. Such correspondence, however, is arguably at variance with reality. Furthermore, this literature has not been able to provide an answer to contractual heterogeneity in the presence of downstream homogeneity. This study contributes to the subject by proposing one such answer. The investigation is presented in two main parts. The first part provides a theoretical analysis of the problem and sets out a model representing the explanation proposed. The second part consists of an empirical investigation of the hypotheses set out in the first part. This empirical investigation is based ofdata collected by means of a survey of UK firms conducted specifically for the purpose of this study. The empirical analysis is performed by means of both a qualitative and an econometric study. The explanation uncovered by our theory, supported by our empirical results, shows that under certain conditions contract mixing represents a separating equilibrium which enables the company upstream (principal) to overcome problems related to hidden action, hidden information and uncertainty downstream. Under certain circumstances such organisational structure represents the 'optimal choice' for the principal in the trade-off between incentives and risk sharing. At the same time, it proves to be optimal for the heterogeneous agents (downstream) by providing them with their maximum level of expected utility. To the best of our knowledge this is the first study that investigates both sides of this agency relationship. In other words, this study demonstrates that the choice of a 'mixed' organisational firm can be driven by efficiency reasons rather than competition reducing targets by the firm.