Category: organizational economics

Why Who the Boss Is Matters (At Least for Franchises)

A few weeks ago I wrote about the Save Local Businesses Act (H.R. 3441), which has passed the U.S. House of Representatives and is currently sitting in the Senate. At the heart of that Act is defining the term “joint employer” for National Labor Relations Board purposes, an issue with tremendous potential implications for the franchising industry, among others. If passed, the Act would codify a long-standing interpretation of franchisees as being the sole employer of their local employees. For reasons I explain in the previous post, that would be a good thing for preserving and facilitating the benefits of franchising.

Franchising is an important business model in the U.S. Franchised local businesses represent the fastest growing segment for employment, and are expected to continue that trend. Franchising obviously offers benefits for both the franchisor and the franchisee.

In a forthcoming paper in Cornell Hospitality Quarterly, Matt Sveum and I find evidence for at least one of the major benefits of franchising. Namely, franchising helps to reduce agency costs and to improve performance incentives at the local establishment level. From the abstract:

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 US 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.

Full citation:
Sveum, Matthew and Sykuta, Michael E., “The Effect of Franchising on Establishment Performance in the U.S. Restaurant Industry,” forthcoming in Cornell Hospitality Quarterly; US Census Bureau Center for Economic Studies Paper No. CES-WP- 16-54. Available at SSRN: https://ssrn.com/abstract=2883267 or http://dx.doi.org/10.2139/ssrn.2883267

Minding Your Business

A few weeks ago I was interviewed for an article about some of the pros and cons of different organizational forms for farm businesses. The article, by Nancy Jorgensen, came out this month’s issue of Today’s Farmer, a publication of MFA, Inc. The intro has the usual caveats:

This article covers the pros and cons of various types of farm organizational structures. We provide a few general definitions and guidelines below, but we are not offering tax or legal advice. You should consult tax, legal and other experts before modifying your structure. Keep in mind that corporate law varies by state. It’s also important to note that no matter what their organizational structure, families continue to own the vast majority of U.S. farms.

You can read the full article here.

 

Franchising and Firm Performance

Much of the research on franchising as an organizational form relies on an agency theory explanation. In short, it assumes operators of local franchise establishments will have greater incentive to operate efficiently if they are owners of the establishment (i.e., franchisees) rather than managers employed by the franchisor-owner. However, there isn’t a lot of empirical research substantiating that assumption. Matt Sveum and my recent working paper finds that there does appear to be a franchise effect–but it depends on the nature of the business format. We use US Census data for essentially all limited- and full-service restaurants in the US and find franchising explains differences in establishment performance for full-service, but not for limited-service, restaurants. The abstract follows:

While there has been significant research on the reasons for franchising, little work has examined the effects of franchising on establishment performance. This paper attempts to fill that gap. We use restricted-access US Census Bureau microdata from the 2007 Census of Retail Trade to examine establishment-level productivity of franchisee- and franchisor-owned restaurants. We do this by employing a two-stage data envelopment analysis model where the first stage uses DEA to measure each establishment’s efficiency. The DEA efficiency score is then used as the second-stage dependent variable. The results show a strong and robust effect attributed to franchisee ownership for full service restaurants, but a smaller and insignificant difference for limited service restaurants. We believe the differences in task programmability between limited and full service restaurants results in a very different role for managers/franchisees and is the driving factor behind the different results.

Regulation and Contract Choice in the Distribution of Wine

That’s the title of a new working paper with one of my former students, Michelle (Mullins) Santiago. You can access the full paper here. The abstract follows:

The wine industry in the United States has grown tremendously over the past few decades, from fewer than 1,000 wineries in 1980 to upwards of 7,700 today. The growth has occurred over a period that has seen substantial changes in the structure of the wine industry, the modes of distribution available to wineries, and the regulations governing them, perhaps most notably the advent of direct-to-consumer shipping of wine across state boundaries. Most economic research, however, has focused on supply relations between wineries and wine grape growers rather than between wineries and their downstream markets. In this paper we examine wineries’ contracting behavior with downstream distributors and the effects of industry structure, winery organizational structure, and state laws regarding direct shipment and distribution franchise laws.

Legal and Illegal Cartels in Europe

There’s what looks to be an interesting workshop next month (10 September) in Belgium  on the organization and behavior of cartels in different legal environments. From the workshop webpage:

Economists and policy analysts know very little about the conditions under which cartels are formed in different legal environments, how they behave against outsiders, how they behave against deviating insiders, and how they react to changes in the economic environment. This event will provide a space to discuss these aspects, based on two projects funded by SEEK.
One of the projects studies cartel organization – a topic on which there is little information to date – through the lens of legal cartels. While such cartels did not have to fear detection and prosecution, they faced the same internal organizational challenges as illegal cartels. The focus is on comparing empirically, in specific sectors, the organizational forms of legal cartels in countries with different legal regimes. The project has collected data on Austrian, Finnish, Norwegian, Swedish and American legal cartels.
The other project has developed new theoretical insight into the anatomy of hard-core cartels and combined it with a rich data set on the recent German cement cartel. The results of this project will be presented to the audience attending the event. The private data set comprises about 340.000 market transactions from 36 customers of German cement producers and encompasses most of the period during which the cartel was functioning, as well as a period after the collapse of the cartel.

The conference is jointly sponsored by Bruegel and SEEK. For more details on speakers or if you’re close enough to be able to attend, check out the website for details.

Open Letter On New Jersey's Tesla Distribution Ban

Geoff Manne, one of my colleagues at Truth On The Market, spearheaded an open letter explaining why New Jersey’s ban on direct distribution of automobiles (specifically, in this case, Tesla Motors) is bad public policy. The letter is signed by over 70 economists and law professors, including yours truly.

I’m no fan of the industrial favoritism Tesla has received via it’s government bailout or consumer subsidies (like so many other alternate-energy car makers). But two wrongs don’t make a right. And while Tesla Motors is the immediate target of this ban, the ban is really on a business model that threatens traditional auto dealership networks. As we explain in the letter, shutting down consumer access to innovative automotive products as a protectionist measure for brick-and-mortar dealerships is simply bad policy.

Head over to TOTM to see Geoff’s post and to read the full letter.

Oh SNAP! An Organizational Failure

As Congress attempts to work out a new farm bill, at the center of the debate between the House and Senate is the Supplemental Nutrition Assistance Program (SNAP), more commonly known as food stamps. SNAP has grown significantly over the past few years, rising from $37.6 billion in 2008 to $78.4 billion in 2012 according the USDA. Of the roughly $1 trillion expected to be spent over the next decade under the anticipated farm bill, about $800 billion is for nutritional assistance programs.

(One may wonder why food stamps and school lunch programs are part of the farm bill. They have been pretty much since World War II, when farming states found a national security reason (under-nourished draftees) to boost demand for excess agricultural production by channeling more food through elementary and secondary schools.  It also makes a nice urban-rural quid pro quo; legislators from urban areas with many more SNAP-eligible voters have incentive to support sending money to rural areas to support farmers, and vice-versa.)

Not surprisingly, the Democratic-controlled Senate wants to “rein in” SNAP spending by $4 billion over the next decade—or about 0.5%–while the Republican-controlled House is looking at a “catastrophic” cut of $20 billion—or less than 3%–over the same time. That’s 3% off a program that has more than doubled in the past five years. (You might sense the sarcasm here).

One of the reasons SNAP has grown so tremendously to begin with—in addition to the economic situation (it has still grown 10%+ the last two years)—is an organizational failure in the way SNAP is administered. Continue reading “Oh SNAP! An Organizational Failure”