Thomas Grandner: Vienna University of Economics & B.A.
Abstract: A franchise contract relocates distributable rent between franchisor and franchisee. With decentralized wage bargaining this modifies the position of the union in wage bargaining. If the rent is relocated to the franchisor completely, then even a strong union is not able to raise the wage above reservation level in the franchisee's firm. If franchisor and franchisee negotiate on rent division, there is an incentive to increase franchise fee with the consequence that franchisee's wage is pushed down. Therefore the overall rent assigned to labor depends on the differences of labor intensity in the franchisor's and franchisee's firm. Firm owners may be able to transfer distributable rents from a firm with a strong union to one with a weak union. Additional a franchising contract shows up a first mover advantage. The franchising contract is placed before wage bargaining, benefiting the franchisor.
Keywords: wage bargaining, franchise contract
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