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Entrepreneurs, Contracts, and the Failure of Young Firms

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Author Info

  • Pierre Azoulay

    ()
    (Sloan School of Management, Massachusetts Institute of Technology, 50 Memorial Drive, Cambridge, Massachusetts 02142-1347)

  • Scott Shane

    ()
    (Smith School of Business, University of Maryland, 4321 Hartwick Road, Suite 300, College Park, Maryland 20740)

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    Abstract

    Although economic theory has emphasized that moral hazard and hold-up problems influence the design of contracts, very little is known about the process by which explicit contracts are established and the effect of contractual arrangements on firm performance. This paper attempts to demonstrate that firms are selected for survival on the basis of contracting efficiency. Based on a statistical analysis of 170 new franchise contracts and interviews with the founders of 16 of these new franchise systems, we show that new franchise chains that adopt exclusive territories are more likely to survive over time than chains that do not. Moreover, successful and failed entrepreneurs possess different information about how to design contracts. These entrepreneurs undertake "contractual experiments" based on the information they possess. Those whose experiments prove to be more consistent with economic theory are rewarded for their superior information with survival.

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    File URL: http://dx.doi.org/10.1287/mnsc.47.3.337.9771
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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 47 (2001)
    Issue (Month): 3 (March)
    Pages: 337-358

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    Handle: RePEc:inm:ormnsc:v:47:y:2001:i:3:p:337-358

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    Web page: http://www.informs.org/
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    Related research

    Keywords: Franchising; Exclusive Territories; Firm Survival; Contract Design; Entrepreneurship;

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    Cited by:
    1. Muriel Fadairo & Cintya Lanchimba Lopez, 2012. "Performance in distribution systems : What is the influence of the upstream firm’s organizational choices ?," Working Papers 1224, Groupe d'Analyse et de Théorie Economique (GATE), Centre national de la recherche scientifique (CNRS), Université Lyon 2, Ecole Normale Supérieure.
    2. Rozenn Perrigot & Thierry Pénard, 2012. "Determinants of E-commerce adoption by franchisors: Insights from the U.S. market," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201206, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    3. Kálecz-Simon, András & Bakó, Barna, 2012. "Vertikális korlátozások - növelik vagy csökkentik a jólétet?. Érvek az irodalomból
      [Vertical constraints - do they increase or reduce welfare?. Arguments in the literature]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(10), pages 1138-1159.
    4. Muriel Fadairo & Cintya Lanchimba, 2012. "Performance in distribution systems : What is the influence of the upstream firm's organizational choices ?," Working Papers halshs-00727382, HAL.
    5. Podoynitsyna, Ksenia & Song, Michael & van der Bij, Hans & Weggeman, Mathieu, 2013. "Improving new technology venture performance under direct and indirect network externality conditions," Journal of Business Venturing, Elsevier, vol. 28(2), pages 195-210.

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