The dynamics of franchise contracting: Evidence from panel data

This paper provides the first systematic evidence on how franchisors adjust their royalty rates and franchise fees as they gain franchising experience . This evidence comes from a unique panel data set that we assembled on the se monetary contract terms for about 1,000 franchisors each year for the 19 80-92 period. We find that there is much persistence, over time, in franchi se contract terms within firms. We find this despite sizable across-firm di fferences in royalty rates and franchise fees. In addition, franchisors do not systematically increase or decrease their royalty rates or franchise fe es as they become better established, contrary to predictions from some spe cific theoretical models. We conclude that variation in contract terms is m ostly determined by differences across firms, not by within-firm changes ov er time. Finally, we find no negative relationship, within firms, between u p-front franchise fees and royalty rates.