Contract Duration: Evidence from Franchise Contracts
36 Pages Posted: 10 Mar 2003
Date Written: February 26, 2003
Abstract
This study provides evidence on the determinants of contract duration using a large sample of franchise contracts. We find that the term of the contract systematically increases with the franchisee's physical and human capital investments, measures of recontracting costs, and the franchisor's experience in franchising (which we argue is negatively related to uncertainty about optimal contract provisions). These results are consistent with the hypothesis that the optimal contract duration involves a tradeoff between protecting the parties against potential hold-up of relationship-specific investment and reducing the flexibility that the parties have to respond to environmental changes.
Keywords: Contract Duration, Asset Specificity, Contracting Costs, Franchising
JEL Classification: D23, L14, L20
Suggested Citation: Suggested Citation
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