Extensive Delegation Combined with High-Powered Incentives in Multiunit Organizations: A Time Series Analysis of the Performance Effects of Franchising

ABSTRACT Firms that operate multiple, homogeneous, geographically dispersed units face difficulty controlling their units due to imperfect information and incompatible incentives. Franchising has long been used to address this classic management control problem by delegating extensive decision rights to franchisees to operate the units and replacing monitoring with high-powered, output-based incentives. The nature of this control problem has changed substantially in the past 20 years with the growth of online review platforms, which can reduce information asymmetries and facilitate franchisee learning. We use recent time-series data from outlets in the same hotel chain that transitioned from company control to franchisee control to provide evidence on the realized benefits of delegation coupled with incentives in the face of agency problems within the current information environment. Beyond franchising, our findings are relevant to a wide range of companies that operate geographically dispersed outlets, such as banks, grocery stores, and automotive repair companies. Data Availability: A confidentiality agreement with the firm that provided data for this study precludes revealing its identity and disseminating original data; a synthetic dataset, representative of the actual data, can be made available for the purpose of replication. JEL Classifications: L22; L14.