The Choice of Contract Duration in Franchising Networks: A Transaction Cost and Resource-Based View

Abstract

Contract duration as component of contract design has both a transaction cost savings function by mitigating exchange hazards and a strategic value creation function by leveraging knowledge-based resources. Previous studies have not explained the value creation function of contract duration in franchising. This study addresses this research gap. Specifically, we complement the transaction cost model of contract duration by developing resource-based hypotheses to explain the knowledge leverage function of contract duration. Using resource-based theory, we expect that intangible knowledge-based resources, such as system-specific knowhow and brand name of the franchisor, will positively influence franchise contract duration. This study contributes to the franchise and contract literature by highlighting that contract duration has – in addition to the safe-guarding function - an important knowledge leverage function. Data from the German franchise sector provides support for the hypotheses.