The Effect of Franchising on Establishment Performance in the U.S. Restaurant Industry
With Michael Sykuta
Forthcoming, Cornell Hospitality Quarterly

(Accepted 12/19/2017)
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 important of managerial discretion.

Working Papers

Working papers are being updated as updates are available. The most recent date is listed next to the links.

Management Differences and Productivity: A Simulated Investigation into Dummy Variables in Two-Stage Data Envelopment Analysis
(updated 11/21/2016)
Abstract: This paper tests the ability of two-stage DEA to pick up on efficiency differences between two groups. Using the context of franchising, I simulate establishment-level data and give franchisee-owned establishments an artificial output bump of various sizes. In the second stage, I test the two of the more common second-stage specifications, OLS and Tobit, against a bootstrap method advocated by Simar and Wilson (2007). Using a dummy variable for ownership, I find that two-stage DEA is able to detect that franchisee-owned establishments are more efficient than their franchisor-owned counterparts using all three second-stage specifications. The results suggest that the estimated difference in efficiency found in the second stage should be thought of as a lower bound on the true effect.