Abstract
Franchise contracts typically contain two forms of payment from franchisee to franchisor: the initial franchise fee and the ongoing royalty payment. Economic analysis and empirical examination yield two different predictions about how these payments should relate to one another. In this study using system level data, we find a positive relationship between the initial franchise fee and royalty rate when controlling for average outlet sales. This is consistent with the argument that the initial franchise fee is not a vehicle for extracting the surplus downstream rents left after royalty payments. Implications for franchise research and practice are discussed, as is the importance of regulatory changes that may make sales data available through franchise disclosure requirements.
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