The Role of Relational Contracts in Inter-Firm Relationships: Theory and Evidence on Multiunit Franchising

Abstract

This paper develops a model of relational contracting to help explain the prevalence of multiunit franchising; a phenomenon not fully understood in the literature. The model is used to derive a key prediction, which is that franchise systems with a greater propensity to engage in multiunit franchising will feature greater mutual cooperation between franchisor and franchisees. Evidence for this prediction is found in data on franchisee-franchisor litigation outcomes from a sample of franchise disclosures.