Does Ownership Structure Influence Regulatory Behavior? The Impact of Franchising on Labor Standards Compliance

Abstract

This paper examines the effect of franchising on compliance with labor standards regulations in the US. Franchisees who typically own and manage their own outlets seek to maximize profit of only their units whereas the franchiser benefits from increases in sales of all outlets in the chain, whether franchised or company-owned. Franchisers are therefore more concerned about the deterioration of brand reputation. This leads us to hypothesize that differences in sensitivity to brand reputation make compliance worse at franchisee-owned outlets than at comparable company-owned outlets. By using a unique pooled cross-section of the Top 20 fast food restaurants in the US, we find that total back-wages (wage repayment equal to the difference between those received and those owed to workers by statute) per investigation at a given franchised outlet are $4,265 larger than at a comparable company-owned outlet, which is roughly four times average back-wages. This franchise effect grows further in magnitude with the use of relevant instruments for franchising status. We argue that the empirical results are more consistent with differences in concern about brand reputation between franchisees and franchisers than other explanations of firm behavior.