Theory and Evidence on Employer Collusion in the Franchise Sector

Abstract

In this paper we study the role of covenants in franchise contracts that restrict the recruitment and hiring of employees from other units within the same franchise chain in suppressing and hiring of employees from other units within the same franchise chain in suppressing find that “no-poaching of workers agreements” are included in a surprising 58 percent of major franchisors’ contracts, including McDonald’s, Burger King, Jiffy Lube and H&R Block. Theoretical models of oligopsony and dynamic monopsony, as well as incentives for investment in job training, are discussed in the context of these no-poaching agreements. Although the occurrence of no-poaching agreements is difficult to predict from franchise or industry characteristics, no-poaching agreements are more common for franchises in low-wage and high-turnover industries.