An empirical study on contractual heterogeneity within the firm: the 'vertical integration-franchise contracts' mix

This paper tests a discrete choice model on the mix of franchised and company-owned outlets (contractual heterogeneity) within the firm. This is often explained by the existing literature as due to heterogeneous characteristics of the outlets. However, correspondence between outlets and contracts characteristics is not often observed in reality. An explanation is proposed which suggests that contract mixing is driven by the contractual choice of both principal and agents, and that heterogeneous agents will choose contracts that match their characteristics. This hypothesis is supported by econometric results, based on outlet level microdata collected by means of a survey of UK firms.