Moral Hazard, Path Dependency, and Failing Franchisors : Mitigating Franchisee Risk through Participation

Employment relations are well understood. Business format franchising is a newer and rapidlyevolving business expansion formula, also providing employment. This article compares the fatesof employees and franchisees in their employer/franchisor insolvency.Whereas employees enjoyprotection, franchisees continue to operate in conditions that have been described as Feudal.We identify the inherence of moral hazard, path dependency and optimism bias as reasons forthe failure of policies and corporations laws, globally, to adapt to the franchise relationship. Thisfailure comes into sharp focus during a franchisor’s insolvency. We demonstrate that the modelsof participation available to employees in the United States, Australia and the United Kingdomcould be used to inform a re-balancing of the franchisees’ relationship with administrators andliquidators during the insolvency of their franchisor, providing franchisees with rights andrestoring their dignity