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Long-Term Franchise Contracts: A Closer Look at the Hold-Up Problem

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Firms, Markets, and Contracts

Part of the book series: Contributions to Economics ((CE))

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Abstract

This paper considers the hold-up problem in franchise contracts. Ex ante the franchisee has to invest into specific equipment. Ex post the relationship to the franchisor is governed by asymmetric information about a local demand parameter. A typical result is a combination of underinvestment by the franchisee and distortions of the short-run allocation. The paper investigates the robustness of this result with respect to different model specifications. It is shown that the case of unobservable investment and unlimited franchisee-liability yields a first-best solution whereas all other cases yield underinvestment.

I am extremely grateful to Rudolf Richter for organizing the International Summer School of the Center for the Study of the New Institutional Economics. I also want to thank Sabine Böckem and Mark Wahrenburg for helpful comments. Any remaining errors are my own.

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Author information

Authors and Affiliations

  1. Lehrstuhl für Allgemeine BWL und Unternehmensrechnung, Universität zu Köln, 50923, Köln, Germany

    Ulf Schiller

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  1. Ulf Schiller
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Editor information

Editors and Affiliations

  1. Institut für Organisation, Universität München, Ludwigstraße 28, D-80539, München, Germany

    Arnold Picot

  2. Volkswirtschaftliches Institut, Universität München, Schackstraße 4, D-80539, München, Germany

    Ekkehart Schlicht

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© 1997 Physica-Verlag Heidelberg

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Schiller, U. (1997). Long-Term Franchise Contracts: A Closer Look at the Hold-Up Problem. In: Picot, A., Schlicht, E. (eds) Firms, Markets, and Contracts. Contributions to Economics. Physica-Verlag HD. https://doi.org/10.1007/978-3-642-46988-6_8

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  • DOI: https://doi.org/10.1007/978-3-642-46988-6_8

  • Publisher Name: Physica-Verlag HD

  • Print ISBN: 978-3-7908-0947-3

  • Online ISBN: 978-3-642-46988-6

  • eBook Packages: Springer Book Archive

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