As an organizational arrangement, the franchise contract lies between anonymous price-mediated exchange and centralized intrafirm employment. In contrast to conventional market exchange, franchise contracts typically impose on franchisees retail quality standards, common hours of business, price controls, and nonlinear payment schedules (for example, fixed initial royalty fees plus a percentage of gross retail revenues), while franchisors typically provide national advertising and training programs, monitor and inspect the franchisees' performance (with varying intensity across industries), and hold the residual power to terminate the franchise agreement. Observations of actual terminations indicate that franchisors sometimes exclude this power. Franchisors sometimes face persistent queues of potential franchisees. In contrast to simple employment contracts, franchise agreements provide for sharing of profits (through royalties on revenue or output) and considerable freedom for independent decisions by local franchisees.1 Why do these franchise contracts exist