The Impacts of Efficiency and Bargaining Power on Contract Structure: Evidence from Franchising

Abstract

The strategy literature is paying increasing attention to contract structure, but has largely followed transaction cost and agency approaches that emphasize efficiency. Bargaining power effects have been investigated much less though they are fundamental to the influential Porterian tradition in strategy. We investigate whether bargaining power impacts provisions in franchise contracts after controlling for efficiency impacts. We find the bargaining power does affect the important provisions regarding contract duration and non-compete period length. However, neither efficiency nor bargaining power variables help explain franchisor termination rights in our data.