How time influences franchise contracts: the Spanish case

This article builds a simple theoretical model for the optimal expected length of a franchise contract. The main outcome is that fixed specific investment positively impacts contract duration confirming previous theoretical conjectures. Additionally, other variables such us the price-cost margin of the franchise, the brand name or the discount factor also play a relevant role. The empirical analysis using a large sample of franchises operating in Spain confirms the main conclusions of the model. However, the connection found between investment and duration, although statistically robust, is weak from an economic point of view. This result suggests the possibility that, in general, most franchisees are not in equilibrium because of the high standardization of this contract term across franchises. In these cases, the expectation of renewal is likely to be a crucial element of adjustment.