The Economic Effects of Franchise Termination Laws

Abstract

* We would like to thank Blake Rhodes and Pam Schommer for excellent research assistance, participants in workshops at Arizona State University, University of California, Berkeley, the University of Chicago, Dartmouth College, Iowa State University, the Justice Department, the University of Rochester, and the University of Utah, as well as Jeff Coles, Arnold Cowan, Jim Dana, Franklin M. Fisher, Stuart Gilson, Ben Hermalin, Cliff Holderness, Gregg Jarrell, Alan Krueger, Wayne Mikkelson, Walter Oi, Jim Poterba, Ajai Singh, Cliff Smith, Kathy Spier, David Weisbach, Jamie Zender, Jerry Zimmerman, and, especially, Kevin J. Murphy and an anonymous referee for comments on an earlier draft. Brickley and Weisbach thank the Managerial Economics Research Center of the University of Rochester and the John M. Olin Foundation, and Dark thanks the College of Business at Iowa State University for financial support. Brickley also thanks the Garn Institute of Finance at the University of Utah for financial assistance. 1 See Mark Robichaut, Franchise Rules Are Back Off Drawing Board, Wall St. J., July 6, 1990, at Bl. Note that, in this article, we focus on laws that apply to business-format franchises. For an analysis of state laws in automobile franchising, see Richard L. Smith II, Franchise Regulation: An Economic Analysis of State Restrictions on Automobile Distribution, 25 J. Law & Econ. 125 (1982). Richard A. Epstein, Unconscionability: A Critical Appraisal, 18 J. Law & Econ. 293, 314-15 (1975); and Paul H. Rubin, The Theory of the Firm and the Structure of the Franchise Contract, 21 J. Law & Econ. 223 (1978). Other work on the economics of franchising includes James A. Brickley & Frederick H. Dark, The Choice of Organizational Form: The Case of Franchising, 18 J. Fin. Econ. 401 (1987); James A. Brickley, Frederick H. Dark, & Michael S. Weisbach, An Agency Perspective on Franchising, 20 Fin. Mgmt. (1991, in