Using Tournaments to Reduce Agency Problems: The Case of Franchising

Anecdotal evidence suggests that franchisors use multiunit franchising to reward franchisees. In this paper, we model multiunit franchising as the reward in a tournament-one solution to the franchising agency problem. We use a unique database of 68 restaurant franchisors and find support for the tournament model. Franchisors that seek franchisees with managerial experience and franchisors that build routines to share knowledge use more multiunit franchising. Also, franchisors that grow faster use more multiunit franchising than franchisors that grow more slowly, suggesting that faster-growing franchisors use multiunit franchising as a reward in a tournament to reduce agency problems.