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30 Eur. J.L. & Econ. 1 (2010)

handle is hein.journals/eurjlwec30 and id is 1 raw text is: Eur J Law Econ (2010) 30:1-16 DOI 10.1007/s10657-009-9124-8 How time influences franchise contracts: the Spanish case Alicia Garcia-Herrera - Rafael Llorca-Vivero Published online: 30 October 2009 © Springer Science+Business Media, LLC 2009 Abstract This article builds a simple theoretical model for the optimal expected length of a franchise contract. The main outcome is that fixed specific investment positively impacts contract duration confirming previous theoretical conjectures. Additionally, other variables such us the price-cost margin of the franchise, the brand name or the discount factor also play a relevant role. The empirical analysis using a large sample of franchises operating in Spain confirms the main conclusions of the model. However, the connection found between investment and duration, although statistically robust, is weak from an economic point of view. This result suggests the possibility that, in general, most franchisees are not in equilibrium because of the high standardization of this contract term across franchises. In these cases, the expectation of renewal is likely to be a crucial element of adjustment. Keywords Fixed investment - Franchise - Price-cost margin Optimal contract duration Spanish sample JEL Classification k00 k12 1 Introduction A franchise contract is a form of organization involving two independent firms with the aim of selling goods and services in a specific area. This relatively new A. Garcfa-Herrera C/ Escultor Alfonso Gabino, no 7, pta 3., 46022 Valencia, Spain e-mail: aliciagherrera@icav.es R. Llorca-Vivero (E) Facultad de Economia, Departamento de Economia Aplicada II, Universitat de Valencia, Avenida de los Naranjos s/n, Edificio Departamental Oriental, 46022 Valencia, Spain e-mail: Rafael.llorca@uv.es _ Springer