Costs of Control: The Source of Economic Rents for McDonald's Franchisees

The main purpose of this article is to establish empirically, using financial data, that there are both ex ante and ex post rents left downstream at McDonald's. We find that the present value of the ex ante rents is around $300K-$455K 1982 dollars. Ex post rents are, of course, even larger. We argue that the ex post rents represent an incentive mechanism that complements the use of profit-sharing rights at McDonald's. We also argue that ex ante rents arise here because franchisees' wealth constraints prevent the up-front extraction of the full present value of the ex post rents. Finally, we note that McDonald's desire for a particular type of individual to operate its franchises--namely, owner-operators whose livelihoods are tied to the success of their outlets--increases the likelihood that downstream operators face liquidity constraints. This in turn contributes to the need for McDonald's to leave ex ante rents downstream.