The Choice Between Single-Unit And Multi-Unit Franchising: Combining Agency And Transaction Cost Perspectives

Abstract

This study investigates the factors explaining the franchisor’s choice between single-unit and multi-unit franchising based on agency theory and transaction cost theory. We examine the impact of behavioral uncertainty due to shirking and free-riding, franchisees’ transaction-specific investments, and environmental uncertainty on the franchisor’s choice of multi-unit franchising. Our empirical results from the German franchise sector provide strong support of the transaction cost hypotheses and relatively weak support of the agency-theoretical hypotheses. This study contributes to the literature by showing that the transaction cost explanation complements the agency cost explanation of multi-unit franchising.