The Economics of Litigation and Arbitration: An Application to Franchise Contracts

Posted: 19 Jan 2004  

Keith N. Hylton

Boston University - School of Law

Christopher R. Drahozal

University of Kansas School of Law

Multiple version iconThere are 2 versions of this paper

Abstract

If we define the deterrence benefits from contract enforcement as avoided harms net of avoidance costs, we should expect contracting parties to choose the dispute resolution forum that provides the greatest difference between deterrence benefits and dispute resolution costs. We apply this framework to franchise contracts and conduct an empirical analysis of the determinants of arbitration agreements among franchising parties. Although it is obvious that contracting parties have an incentive to choose arbitration in order to reduce dispute resolution costs, there have been no studies of the importance of deterrence concerns. We examine the deterrence hypothesis and find a great deal of support for it. Our results suggest that deterrence factors outweigh litigation costs in the design of dispute resolution agreements. We find that the probability of arbitration is significantly higher when the parties rely on implicit contract terms for governance and compliance with those terms is difficult to ensure.

Keywords: contract law, tort law, law and economics, litigation, governance, franchising, arbitration

JEL Classification: K00, K12, K13, K41

Suggested Citation

Hylton, Keith N. and Drahozal, Christopher R., The Economics of Litigation and Arbitration: An Application to Franchise Contracts. Journal of Legal Studies, Vol. 32, pp. 549-584, June 2003. Available at SSRN: https://ssrn.com/abstract=490401

Keith N. Hylton (Contact Author)

Boston University - School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States
617-353-8959 (Phone)
617-353-3077 (Fax)

Christopher R. Drahozal

University of Kansas School of Law ( email )

Green Hall
1535 W. 15th Street
Lawrence, KS 66045-7577
United States
785-864-9239 (Phone)
785-864-5054 (Fax)

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