Ongoing Variable Payments in Portuguese and Spanish Franchise Systems

Abstract

This article provides evidence on the determinants of the ongoing variable payments used in Portuguese and Spanish franchise systems. Consistent with the Two-Sided Moral Hazard Model, the ongoing variable payments decrease as the costs of monitoring franchisees’ efforts rise. The results also show that the higher the franchisors' inputs, the higher the ongoing variable payments. The findings are also consistent with the Property Rights Theory: the ongoing variable payments to provide the necessary incentives for the franchisor increase as the franchisor's system-specific investments rise, and the more important the franchisee's intangible investments, the lower the ongoing variable payments to provide the incentive for the franchisees.