The Effect of Franchising on Establishment Performance in the US Restaurant Industry

A central theme in much of the franchising literature is that franchising mitigates the Principle-agent problems between the owner of the franchise company and the operator of the local establishment by making the operator the owner-franchisee of the establishment. Despite the centrality of that assumption in the literature, there is little empirical evidence to support it. We use Census of Retail Trade data for essentially all full- and limited-service restaurants in the United States to test whether franchisee-ownership affects performance at the establishment level. We find a strong and robust franchise effect for full-service restaurants but little effect among limited-service restaurants. We argue this difference is consistent with agency costs given differences in work processes and the importance of managerial discretion.