Multitasking Situation Of Franchising Information Screening Study

With the features of low investment, low risk and rapid expansion, Franchise business mode is widely adopted in different industries and become an interesting theoretical research topic. Usually, franchisee needs to perform multiple tasks: product promotion and sales, advertising, after-sale service, etc. However, few studies have paid attention to the modeling problem of multi-task feature in franchising relationship. In this paper, we analyze this topic based on principal-agent theory since franchising is considered as one of the most typical example in that field.Principal-agent problem has already been deeply discussed over decades. There is a large body of literature focusing on both of its theoretical and application values. Multi-task principal-agent model is one of its major extensions, which is adopted in our paper as modeling basis.Furthermore, the efforts franchisee spend on some types of tasks (e.g. after-sale service) are difficult to observe, measure or verify, which then become franchisee’s private information as a result. Such information asymmetry is the essential feature of principal-agent theory. Correspondingly, the core question franchisor needs to solve is how to reveal it and design optimal agent incentive plan.Hence, we consider both multi-task and information screening problems in franchising relationship. In our model, franchisee performs two tasks:production task and maintenance task. We combine moral hazard and adverse selection together by assuming that maintenance effort is franchisee’s private information while production effort level is unobservable. The franchisor’s objective is to design a mechanism to reveal the real level of franchisee’s maintenance effort and maximize her profit at the same time. With rigorous mathematical derivation and precise logic discussion, we analyze the mechanism design process and conditions that should be met. We show that the optimal menu contract is piecewise. Besides, how the contract parameters are influenced by franchisee’s subjective risk is also involved.