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The Effect of Contract Regulation: The Case of Franchising


Jonathan Klick


University of Pennsylvania Law School; Erasmus School of Law; PERC - Property and Environment Research Center

Bruce H. Kobayashi


George Mason University - School of Law

Larry E. Ribstein (Deceased)


University of Illinois College of Law; PERC - Property and Environment Research Center

December 13, 2006

George Mason Law & Economics Research Paper No. 07-03
2nd Annual Conference on Empirical Legal Studies Paper
FSU College of Law, Law and Economics Paper No. 07/001

Abstract:     
States and the federal government have enacted laws intended to police franchisors' use of termination provisions in franchise contracts to opportunistically take over profitable establishments. This regulation may, however, reduce the total number of chain outlets because franchising is a valuable form of contracting and termination rights allow franchisors to police franchisee free-riding on the franchised trademark. On the other hand, no such effect is implied if the regulation reduces franchisors' extra gains from skimming profitable franchises. We exploit two new sources of data to provide new empirical evidence on the effects of franchise regulation. Panel data on fast food establishments extracted from uniform franchise offering circulars show that laws restricting franchisor termination rights lead to a reduction in franchising, and this reduction is not offset by the concomitant increase in franchisor-operated establishments. This article also examines how Coasian bargaining between the franchisor and franchisee can mitigate the effect of regulation. In particular, regulation may be apparently important but actually inconsequential because affected parties can easily waive the regulation or avoid it through contractual choice-of-law and choice-of-forum clauses. To examine this, we use state employment data to more broadly examine the effects of franchise regulation. We find that employment in franchise industries is significantly reduced when states enact restrictions on franchisor termination rights and the effect is larger when states limit the ability to contract around these restrictions.

Number of Pages in PDF File: 58

Keywords: Franchise, Termination, Labor, Opportunistic Behavior, Corporate Law

JEL Classification: D21, D23, D86, G38, K12, K22, L14, L15, L21, L22

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Date posted: January 23, 2007  

Suggested Citation

Klick, Jonathan and Kobayashi, Bruce H. and Ribstein (Deceased), Larry E., The Effect of Contract Regulation: The Case of Franchising (December 13, 2006). George Mason Law & Economics Research Paper No. 07-03; 2nd Annual Conference on Empirical Legal Studies Paper; FSU College of Law, Law and Economics Paper No. 07/001. Available at SSRN: http://ssrn.com/abstract=951464 or http://dx.doi.org/10.2139/ssrn.951464

Contact Information

Jonathan Klick (Contact Author)
University of Pennsylvania Law School ( email )
3501 Sansom Street
Philadelphia, PA 19104
United States
2157463455 (Phone)
Erasmus School of Law ( email )
3000 DR Rotterdam
Netherlands
PERC - Property and Environment Research Center
2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

Bruce H. Kobayashi
George Mason University - School of Law ( email )
3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8034 (Phone)
703-993-8088 (Fax)
HOME PAGE: http://mason.gmu.edu/~bkobayas
Larry Edward Ribstein (Deceased)
University of Illinois College of Law ( email )
504 E. Pennsylvania Avenue
Champaign, IL 61820
United States
217-244-9881 (Phone)
217-244-1478 (Fax)
PERC - Property and Environment Research Center
2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

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