The possibility of adverse selection remains high in the case of ISUF because of the franchisor's lack of knowledge of local conditions and also because of the large number of franchisees involved.
Thus, other things being equal, ISUF will need a taller hierarchy than IMUF.
Dant and Nasr (1998) suggest that MUF facilitates more upward information flow than ISUF because IMUF entails better alignment of franchisor-franchisee goals in areas such as maintenance of brand name capital.
Our analysis suggests that these problems are likely to be less in IMUF than ISUF.
Thus, the problem of under-investment by franchisees is likely to be far less in IMUF than in ISUF.
Second, compared to more diversified risk-bearing agents in IMUF, a higher perceived risk by less diversified risk-bearing agents in ISUF might lead to their demanding a higher compensation (Brickley and Dark, 1987).
Our analysis shows that free-riding is likely to be less prevalent in IMUF than in ISUF.
Our analysis shows that the likelihood that either the franchisor or the franchisee will engage in opportunistic behavior aimed at appropriating quasi-rents is lower in IMUF than in ISUF.
The foregoing analysis suggests that agency theory can provide a theoretical explanation for the prevalence of multi-unit franchising by systematically comparing IMUF and ISUF in terms of various agency problems.