The Effect of Contract Regulation: The Case of Franchising

58 Pages Posted: 23 Jan 2007

See all articles by Jonathan Klick

Jonathan Klick

University of Pennsylvania Carey Law School; Erasmus School of Law; PERC - Property and Environment Research Center

Bruce H. Kobayashi

George Mason University - Antonin Scalia Law School

Larry E. Ribstein

University of Illinois College of Law (deceased); PERC - Property and Environment Research Center

Date Written: December 13, 2006

Abstract

States and the federal government have enacted laws intended to police franchisors' use of termination provisions in franchise contracts to opportunistically take over profitable establishments. This regulation may, however, reduce the total number of chain outlets because franchising is a valuable form of contracting and termination rights allow franchisors to police franchisee free-riding on the franchised trademark. On the other hand, no such effect is implied if the regulation reduces franchisors' extra gains from skimming profitable franchises. We exploit two new sources of data to provide new empirical evidence on the effects of franchise regulation. Panel data on fast food establishments extracted from uniform franchise offering circulars show that laws restricting franchisor termination rights lead to a reduction in franchising, and this reduction is not offset by the concomitant increase in franchisor-operated establishments. This article also examines how Coasian bargaining between the franchisor and franchisee can mitigate the effect of regulation. In particular, regulation may be apparently important but actually inconsequential because affected parties can easily waive the regulation or avoid it through contractual choice-of-law and choice-of-forum clauses. To examine this, we use state employment data to more broadly examine the effects of franchise regulation. We find that employment in franchise industries is significantly reduced when states enact restrictions on franchisor termination rights and the effect is larger when states limit the ability to contract around these restrictions.

Keywords: Franchise, Termination, Labor, Opportunistic Behavior, Corporate Law

JEL Classification: D21, D23, D86, G38, K12, K22, L14, L15, L21, L22

Suggested Citation

Klick, Jonathan and Kobayashi, Bruce H. and Ribstein, Larry Edward, The Effect of Contract Regulation: The Case of Franchising (December 13, 2006). George Mason Law & Economics Research Paper No. 07-03, 2nd Annual Conference on Empirical Legal Studies Paper, FSU College of Law, Law and Economics Paper No. 07/001, Available at SSRN: https://ssrn.com/abstract=951464 or http://dx.doi.org/10.2139/ssrn.951464

Jonathan Klick (Contact Author)

University of Pennsylvania Carey Law School ( email )

3501 Sansom Street
Philadelphia, PA 19104
United States
2157463455 (Phone)

Erasmus School of Law ( email )

3000 DR Rotterdam
Netherlands

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

Bruce H. Kobayashi

George Mason University - Antonin Scalia Law School ( email )

3301 Fairfax Drive
Arlington, VA 22201
United States
703-993-8034 (Phone)
703-993-8088 (Fax)

HOME PAGE: http://mason.gmu.edu/~bkobayas

Larry Edward Ribstein

University of Illinois College of Law (deceased)

PERC - Property and Environment Research Center

2048 Analysis Drive
Suite A
Bozeman, MT 59718
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,309
Abstract Views
8,618
Rank
28,392
PlumX Metrics