Why Do Firms Impose Vertical Restraints? Evidence from Franchise Contracts

Franchising is a business form in which one firm (the “franchisor”) licenses an- other firm or individual (the “franchisee”) to operate businesses using the franchisor’s trademarks and proprietary business methods. Vertical restraints—contractual controls imposed by an upstream firm on the operations of a downstream firm, such as price, supplier and customer restrictions—are the essential features of franchise contracts. The presence or absence of particular vertical restraints determine which business decisions the franchisor seeks to control, and which it seeks to delegate to local managers. There are several theories seeking to explain why firms impose vertical restraints. One explanation focuses on agency costs and the role of vertical restraints in restraining franchisee opportunistic behavior. Another emphasizes the role of risk and uncertainty and the need for brand owners to delegate authority to local managers with superior information. Finally, some explanations point to the role of vertical restraints in labor discipline, arguing that firms deploy vertical restraints to target a vulnerable (low-skill, high-turnover, low-wage) workforce for downstream employment. By removing non-labor variables from the franchisee’s profit-maximizing choice set, vertical restraints compel franchisees to focus on minimizing labor costs and extracting labor effort for their profit margins, to the exclusion of alternative profit-maximizing strategies like charging higher prices, substituting cheaper inputs, investing in training, or motivating employees with efficiency wages. Using a data set created from 530 franchise contracts, I examine which franchisor characteristics predict the likelihood of imposing vertical restraints. I find that agency cost, risk, and worker characteristic variables are significantly associated with the likelihood of imposing vertical restraints, but that much of the variation in the likelihood of imposing vertical restraints remains unexplained

The Historical and Legal Creation of a Fissured Workplace: The Case of Franchising

This dissertation explores the consequences of institutional change in capitalist firms, focusing on vertical dis-integration, the legal boundaries of the firm and what David Weil has called workplace fissuring, in which corporations place intermediaries (subcontractors, temp agencies, or franchisees) between themselves and workers, often with negative consequences for workers. It focuses specifically on franchising, a type of fissured workplace in which one firm outsources retail operations to smaller, legally independent franchisees. The first chapter uses archival sources to identify the legal and policy changes driving workplace fissuring in the franchising context: specifically the relaxing of antitrust prohibitions on vertical restraints (contractual controls on separate firms, such as price and supplier restrictions). These contractual mechanisms, which allow chains to achieve uniformity and control over their outlets without directly owning them, helped create fissured workplaces in the case of franchising. I show that franchising firms waged a struggle in courts and legislatures to expand their ability to impose vertical restraints, pulling in the legal boundaries of the firm and leaving workers outside. With a formal model emphasizing the two-level principal-agent problem in franchising (between franchisors and franchisees, and franchisees and workers), the second chapter shows that franchise brands can induce very high levels of franchisee effort by leveraging product market power and one-sided contract terms to reduce the franchisee\u27s bargaining position. Franchising in this context functions as a type of surveillance and labor discipline organizational technology, in which franchise contracts induce franchisees to surveil production workers and extract high levels of effort from them, reducing the investments in monitoring and/or efficiency wages that franchisors would otherwise have to make. The third chapter exploits a new, hand-collected data set from 530 franchise contracts, to link, to my knowledge for the first time, vertical restraints to workforce characteristics. It uncovers an empirical relationship between contingent, relatively unskilled and low-wage workforces and the likelihood of franchisors imposing vertical restraints. I argue that franchisors impose vertical restraints to target a vulnerable and cheap workforce. By removing alternative profit-making strategies from the franchisees\u27 decision set, these restraints incentivize franchisees to focus on minimizing labor costs and extracting effort from workers for their profit margins

The Economics of Just Transition: A Framework for Supporting Fossil Fuel-Dependent Workers and Communities in the United States

We develop a Just Transition framework for U.S. workers and communities that are currently dependent on domestic fossil fuel production. Our rough high-end estimate for such a program is a relatively modest $600 million per year. This level of funding would pay for 1) income, retraining and relocation support for workers facing retrenchments; 2) guaranteeing the pensions for workers in the affected industries; and 3) mounting effective transition programs for what are now fossil-fuel dependent communities. The paper first summarizes the evidence on how much the U.S. fossil fuel industry will need to contract to achieve CO2 emissions reduction targets consistent with the global targets established by the Intergovernmental Panel on Climate Change (IPCC). We then consider the impact of fossil fuel cutbacks on five ancillary U.S. industries, including support activities for coal and oil/gas as well as oil refining, electric power generation, and natural gas distribution. Section 3 presents estimates on job cuts that will occur in the fossil fuel and ancillary industries due to U.S. fossil fuel production cutbacks. Combining all fossil fuel and ancillary industries, we show that fully 83 percent of the job losses can be covered through attrition-by-retirement. To address the remaining 17 percent of job losses through fossil fuel industry cutbacks, we propose reemployment guarantees in the growing clean energy industries for displaced workers. As part of this job guarantee program, we estimate the costs of three provisions for the displaced workers: 100 percent compensation insurance for five years; retraining; and relocation support. Section 4 reviews the status of pension programs in the fossil fuel and ancillary industries and propose measures to maintain these pension programs at full funding into the future. Section 5 examines measures to support communities that are presently heavily dependent on the U.S. fossil fuel industry. The concluding section 6 brings together our cost estimates for the three components of our Just Transition program

What Do Franchisees Do? Vertical Restraints as Workplace Fissuring and Labor Discipline Devices

Applying a simple model to a data set created from 530 franchise contracts, this article shows that the loosening of antitrust restrictions on vertical restraints—competition restrictions in agreements between firms at different levels of the production and distribution process—allows trademarked brands to control wages and working conditions across the boundaries of the firm, at legally separate franchised establishments. Some vertical restraints reduce the bargaining power of franchisees, causing them to exert extraordinarily high effort levels. Other vertical restraints limit franchisee discretion and focus their efforts on labor cost and labor discipline for their profit margins. By monitoring the franchisees who monitor workers, franchisors control wages at franchised establishments without incurring the legal responsibilities and liabilities of traditional employment. To properly regulate franchising and other similar contracting arrangements, antitrust and labor law should be brought together rather than considered in isolation

The Effect of Franchise No-Poaching Restrictions On Worker Earnings

We evaluate the nationwide impact of the Washington State attorney general’s 2018-2020 enforcement campaign against no-poach clauses in franchising contracts, which prohibited worker movement across locations within a chain. Implementing a staggered difference-in-differences research design using Burning Glass Technologies job vacancies and Glassdoor salary reports from numerous industries, we estimate a 6 percent increase in posted annual earnings from the job vacancy data and a 4 percent increase in worker-reported earnings

The Effect of Franchise No-Poaching Restrictions on Worker Earnings

We evaluate the impact of the Washington State Attorney General's enforcement campaign against employee no-poaching clauses in franchising contracts, which unfolded from 2018 through early 2020. Implementing a staggered difference-in-differences research design using Burning Glass Technologies job vacancies and Glassdoor salary reports, we document the nationwide effect of the enforcement campaign on pay at franchising chains across numerous industries. Our preferred specification estimates a 6.6% increase in posted annual earnings from the job vacancy data and an approximate 4% increase in worker-reported earnings