Contract Duration: Evidence from Franchise Contracts

36 Pages Posted: 10 Mar 2003

See all articles by James A. Brickley

James A. Brickley

University of Rochester - Simon Business School

Sanjog Misra

University of Chicago - Booth School of Business

R. Lawrence Van Horn

Vanderbilt University - Strategy and Business Economics

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

Brickley, James A. and Misra, Sanjog and Van Horn, R. Lawrence, Contract Duration: Evidence from Franchise Contracts (February 26, 2003). Simon School of Business Working Paper No. FR 03-08. Available at SSRN: https://ssrn.com/abstract=383700 or http://dx.doi.org/10.2139/ssrn.383700

James A. Brickley

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-160L
Rochester, NY 14627
United States
585-275-3433 (Phone)
585-442-6323 (Fax)

Sanjog Misra

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

R. Lawrence Van Horn (Contact Author)

Vanderbilt University - Strategy and Business Economics ( email )

Nashville, TN 37203
United States

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