How to Design Franchise Contracts: the Role of Contractual Hazards and Experience
Abstract: We analyze factors determining the degree of contractual completeness in franchising. We argue that heterogeneity in firms’ contract design capabilities is an important factor along with different contractual hazards. Our results support these hypotheses showing that experienced franchisors draw up more complete contracts. Additionally, we observe that the effects of contractual hazards on completeness are not always positive and direct and that there may be a substitution effect between formal and relational governance mechanisms because risks of bilateral expropriations might serve as a mutual guarantee. This also suggests that contract analysis must not focus on particular clauses but on the contract as a whole.