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Entrepreneurs, Contracts, and the Failure of Young Firms

Author

Listed:
  • 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)

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.

Suggested Citation

  • Pierre Azoulay & Scott Shane, 2001. "Entrepreneurs, Contracts, and the Failure of Young Firms," Management Science, INFORMS, vol. 47(3), pages 337-358, March.
  • Handle: RePEc:inm:ormnsc:v:47:y:2001:i:3:p:337-358
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    File URL: http://dx.doi.org/10.1287/mnsc.47.3.337.9771
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    References listed on IDEAS

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    Cited by:

    1. repec:spr:busres:v:10:y:2017:i:1:d:10.1007_s40685-016-0041-8 is not listed on IDEAS
    2. Bakó, Barna & Kálecz-Simon, András, 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.
    3. Xiao, Junji & Ju, Heng, 2016. "The determinants of dealership structure: Empirical analysis of the Chinese auto market," Journal of Comparative Economics, Elsevier, vol. 44(4), pages 961-981.
    4. Thierry Pénard & Rozenn Perrigot, 2015. "Search Online – Purchase Online in Franchising: An Empirical Analysis of Franchisor Website Functionality," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201517, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
    5. Salvatore Piccolo & Markus Reisinger, 2011. "Exclusive Territories and Manufacturers' Collusion," Management Science, INFORMS, pages 1250-1266.
    6. repec:kap:ejlwec:v:44:y:2017:i:3:d:10.1007_s10657-015-9497-9 is not listed on IDEAS
    7. Scott Shane & Venkatesh Shankar & Ashwin Aravindakshan, 2006. "The Effects of New Franchisor Partnering Strategies on Franchise System Size," Management Science, INFORMS, pages 773-787.
    8. 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.
    9. Scott A. Shane & Karl T. Ulrich, 2004. "50th Anniversary Article: Technological Innovation, Product Development, and Entrepreneurship in Management Science," Management Science, INFORMS, pages 133-144.
    10. 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 Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    11. 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.
    12. repec:gam:jsusta:v:9:y:2017:i:8:p:1419-:d:107916 is not listed on IDEAS
    13. Robert A. Baron & Michael D. Ensley, 2006. "Opportunity Recognition as the Detection of Meaningful Patterns: Evidence from Comparisons of Novice and Experienced Entrepreneurs," Management Science, INFORMS, pages 1331-1344.
    14. 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.
    15. Arturs Kalnins, 2004. "An Empirical Analysis of Territorial Encroachment Within Franchised and Company-Owned Branded Chains," Marketing Science, INFORMS, vol. 23(4), pages 476-489, September.

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