Chain organizations operate units which are ty
pically dispersed across different types of
markets, and thus serve significantly dive
rging customer bases. Such market-type
dispersion is likely to compromi
se the headquarters' ability to
control its store managers'
behavior and satisfy the di
vergent needs of different
types of customers.
In this paper we find evidence that market-type
dispersion is an important determinant of
delegation and the provision of incentives
through the organizationa
l design choice of
franchising. Specifically, we show that market-t
ype dispersion is related to the degree of
franchising at the chain level as well as the
probability of franchising a given store within
a chain. Our results are robust to alternative
definitions of market-type dispersion and to
other determinants of franchising such
as the stores' geographic distance from
headquarters and geographic dispersion. Additional
analyses also suggest that chains that
do not franchise at all, may cope with
market-type dispersion by decentralizing
operations from headquarters to their stores, a
nd, to a weaker extent, by providing higher
variable pay to their store managers.