How to Design Franchise Contracts: The Role of Contractual Hazards and Experience

This paper analyzes factors determining contractual completeness in franchising. We argue that completeness is affected by firms' contract design capabilities along with different contractual hazards. Our results support these hypotheses by 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. There may be also a substitution effect between formal and relational governance mechanisms because risks of bilateral expropriations might serve as a mutual guarantee. This interaction also suggests that contract analysis must not only focus on particular clauses but also on the contract as a whole.