Differential effects of plural ownership and governance mechanisms in limiting shirkers and free riders

Abstract

Using evidence from paired franchisor-franchisee dyads, this study identifies how plural formed ownership mechanisms curb the risk of shirking and free riding in franchise systems. These risks have damaging effects on the invested capital of franchisee entrepreneurs. Although shirking and free riding produce a major source of uncertainty for the franchisee entrepreneur it can be limited by plural formed governance dimensions. These mechanisms have different effects based on unit status, i.e., company owned-units versus franchisee-units. We tested our model using a paired-dyadic data approach to mitigate the problem of shared-method variance among the psychometric measures. Results support the contention that competition limits shirking and free riding across inter-firm relationships, but did not support the hypothesized role of relational mechanisms in lowering potential shirking and free riding. Also, endogeneity test uncovered that dealer’s self-selected into either one of the plural form contracts. Drawing on the economics, marketing and management literatures, this study presents a basis for further investigation by placing international franchising entrepreneurship into a broader context of transactional and relational governance.