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Territorial Restrictions in Franchise Contracts

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Author Info
Mathewson, Frank
Winter, Ralph

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Abstract

Efficient contracts set incentives through the assignment of rights and profit shares. Although efficient contracts have been used to explain the nature of the firm, the use of contractual rights in specific business contracts is relatively unexplored. The authors analyze contractual rights in franchise systems, in particular the right to add franchisees. An exclusive territory assigned to an initial franchisee is not an immutable guarantee but rather a starting point for subsequent renegotiation in the franchise relationship. Exclusivity is, therefore, profitable when franchisee efforts are critical to the venture. A sample of franchise contracts reveals evidence consistent with the model's prediction. Copyright 1994 by Oxford University Press.

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Publisher Info
Article provided by Oxford University Press in its journal Economic Inquiry.

Volume (Year): 32 (1994)
Issue (Month): 2 (April)
Pages: 181-92
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Handle: RePEc:oup:ecinqu:v:32:y:1994:i:2:p:181-92

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  1. David de Meza & Mariano Selvaggi, 2004. "Exclusive Contracts Foster Relationship-Specific Investment," The Centre for Market and Public Organisation 04/105, Department of Economics, University of Bristol, UK. [Downloadable!]
  2. Hendrikse, G.W.J. & Jiang, T., 2005. "Plural Form in Franchising: An Incomplete Contracting Approach," Research Paper ERS-2005-090-ORG Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
  3. Olivier Cochet & Thomas Ehrmann, 2007. "Preliminary evidence on the appointment of institutional solutions to franchisor moral hazard-the case of franchisee councils," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(1), pages 41-55. [Downloadable!]
  4. Josef Windsperger, 2002. "The Structure of Ownership Rights in Franchising: An Incomplete Contracting View," European Journal of Law and Economics, Springer, vol. 13(2), pages 129-142, March. [Downloadable!] (restricted)
  5. Hendrikse, G.W.J. & Jiang, T., 2007. "An Incomplete Contracting Model of Governance Structure Variety in Franchising," Research Paper ERS-2007-049-ORG Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
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