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Contract Duration: Evidence from Franchising

Listed author(s):
  • Brickley, James A
  • Misra, Sanjog
  • Van Horn, R Lawrence
Registered author(s):

    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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    File URL: http://dx.doi.org/10.1086/501081
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    Article provided by University of Chicago Press in its journal Journal of Law and Economics.

    Volume (Year): 49 (2006)
    Issue (Month): 1 (April)
    Pages: 173-196

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    Handle: RePEc:ucp:jlawec:y:2006:v:49:i:1:p:173-96
    Contact details of provider: Web page: http://www.journals.uchicago.edu/JLE/

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    1. Milgrom, Paul R, 1988. "Employment Contracts, Influence Activities, and Efficient Organization Design," Journal of Political Economy, University of Chicago Press, vol. 96(1), pages 42-60, February.
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    11. Klein, Benjamin & Crawford, Robert G & Alchian, Armen A, 1978. "Vertical Integration, Appropriable Rents, and the Competitive Contracting Process," Journal of Law and Economics, University of Chicago Press, vol. 21(2), pages 297-326, October.
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    14. Brickley, James A, 1999. "Incentive Conflicts and Contractual Restraints: Evidence from Franchising," Journal of Law and Economics, University of Chicago Press, vol. 42(2), pages 745-774, October.
    15. Vroman, Susan B, 1989. "Inflation Uncertainty and Contract Duration," The Review of Economics and Statistics, MIT Press, vol. 71(4), pages 677-681, November.
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