This ROW planning grant develops a plan for the first empirical analysis of signalling models in franchising. Franchise contracts generally involve the payment, by the franchisee to the franchiser, of a constant proportion of the former's sales or profits in royalties, as well as a lump-sum franchise fee, in exchange for the franchiser's assistance and the right to use his tradename. One implication of signalling models is that the more capable franchisers can signal their potential profitability to franchisees by offering contracts that make a large proportion of revenues dependent on the performance of each individual outlet. In other word, the contract a "good" franchiser should offer would involve a high royalty rate and a low franchise fee to the point where a "bad" type would be unwilling to offer the same contract. A franchiser can also make revenues more dependent on the performance of individual outlets by operating some units directly. Another implication of signalling models is that the longer a firm has been in business, the greater the probability of being a "good" type; hence as time goes by, it becomes less important for firms to signal their type through the contract that they offer. This project is worthwhile because the results of the research will provide data and new insights on franchising. This planning grant permits the investigator to develop and start testing a signalling theory using survey data on an average of 1000 franchisers per year from 1980 to 1988 inclusively. These surveys provide information on franchisers' total number of outlets, broken down between those that are company-owned and those that are franchised, their sector of operations, the royalty rates and franchise fees they ask for, the number of years since they began their operations and the number of years since they began franchising.
