Prior interactions and contractual completeness in Spanish franchising

Abstract

Prior interactions between partners had led authors to emphasize the importance of relational contracting in interfirm relationships. We discern two learning effects from prior interactions (about the partner and about the transaction) to show that formal contracting is ubiquitous in franchising. Using a sample of 74 contracts from SME Spanish franchises, our results indicate that experienced franchisors complete their contracts more, always introducing more contingencies, even those relating to their own obligations. Furthermore, franchisor’s reputation does not only not reduce the degree of completeness regarding the franchisor’s obligations but also increases the franchisees’ obligations. These findings suggest, first, that franchisors prefer formal contracting because it is feasible and affordable for them and signals their commitment to the chain in a more credible way and, second, that formal and relational contracting do not seem to work as substitutes. We conclude that formalization is always necessary to enforce franchise agreements, regardless of relational contracting.