Bonding through investments: evidence from franchising

Giorgo Sertsios*

*Autor correspondiente de este trabajo

Producción científica: Contribución a una revistaArtículorevisión exhaustiva

9 Citas (Scopus)


This article studies whether producers' up-front investments can help sustain relations with business partners. The initial investment combined with the business partner's threat to terminate the contract before it expires can generate a bonding mechanism that precludes the producer from behaving opportunistically. I test this view using franchise contract data and a natural experiment. In practice, the franchisor (business partner) determines how much a franchisee (producer) needs to invest up-front. I show that franchisors affected by the passing of a law that restricts their ability to terminate misbehaving franchisees ask their franchisees for higher up-front investments. This result is particularly large for small franchise systems, as franchisees' investments are less redeployable in case of contract termination. The data suggest that contractual up-front investments can be used to sustain business relations.

Idioma originalInglés
Páginas (desde-hasta)187-212
Número de páginas26
PublicaciónJournal of Law, Economics, and Organization
EstadoPublicada - 1 mar. 2015

Nota bibliográfica

Publisher Copyright:
© The Author 2013. Published by Oxford University Press on behalf of Yale University. All rights reserved.


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