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Contract Duration from Franchise Contracts
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Short Description: 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
Content Inside: CONTRACT DURATION: EVIDENCE FROM FRANCHISE CONTRACTS
James A. Brickley, Sanjog Misra, R. Lawrence Van Horn*
William E. Simon Graduate School of Business Administration University of Rochester, Rochester NY 14627
June 21, 2002
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.
*The authors thank Harry DeAngelo, Oliver Richard, Bill Schwert, Cliff Smith, Jerry Zimmerman, and participants of a seminar at the University of Rochester for helpful comments. Keywords: Contract duration, asset specificity, contracting costs, franchising JEL Classification: D23, L14, L20
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