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Contract Duration: Evidence from Franchising

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  • Brickley, James A
  • Misra, Sanjog
  • Van Horn, R Lawrence
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    Abstract

    Economists generally view standard franchise contracts as efficient, while franchisee advocates view them as exploitive. Consistent with the economic view, we find that contract duration is positively and significantly related to the franchisee's physical and human capital investments (which are often firm specific). In contrast to assertions by franchisee advocates, we find that these relations exist in subsamples containing only the most established franchisors (as measured by size and experience) and that larger, more experienced franchisors tend to offer longer-term contracts than do newer franchisors. Our evidence also suggests that there is learning across firms about optimal contract terms.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Law and Economics.

    Volume (Year): 49 (2006)
    Issue (Month): 1 (April)
    Pages: 173-96

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    Handle: RePEc:ucp:jlawec:y:2006:v:49:i:1:p:173-96

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    Web page: http://www.journals.uchicago.edu/JLE/

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    Cited by:
    1. Cain, Matthew D. & Denis, David J. & Denis, Diane K., 2011. "Earnouts: A study of financial contracting in acquisition agreements," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 151-170, February.
    2. Alicia García-Herrera & Rafael Llorca-Vivero, 2010. "How time influences franchise contracts: the Spanish case," European Journal of Law and Economics, Springer, vol. 30(1), pages 1-16, August.
    3. López-Bayón, Susana & González-Díaz, Manuel, 2010. "Indefinite contract duration: Evidence from electronics subcontracting," International Review of Law and Economics, Elsevier, vol. 30(2), pages 145-159, June.
    4. Qiu, Larry D. & Wang, Susheng, 2011. "BOT projects: Incentives and efficiency," Journal of Development Economics, Elsevier, vol. 94(1), pages 127-138, January.

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