Entrepreneurial orientation, risk and incentives: the case of franchising

The standard principal-agent model predicts a trade-off in contract design between the protection against risk and incentive motivations. Distinguishing two types of risks, we show that, contrary to this traditional view, the relationship between risk and incentives can be positive. In franchise contracting, this implies that the royalty rate decreases with the risk faced by the franchisee on the local market. Using a unique panel dataset...