Contract Duration: Evidence from Franchising
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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