Nicholas Argyres, Washington University in St Louis
Nicholas Argyres, Washington University in St Louis
The Role of Relational Contracts in Inter-Firm Relationships: Theory and Evidence on Multiunit Franchising
The Role of Relational Contracts in Inter-Firm Relationships: Theory and Evidence on Multiunit Franchising
The Role of Relational Contracts in Inter-Firm Relationships: Theory and Evidence on Multiunit Franchising
Nicholas Argyres, Janet Bercovitz, and Giorgio Zanarone
Abstract: Relational contracting models explain features of long-term exchange relationships in which moral hazard is one-sided. In this paper, we develop a relational contracting model in the context of two-sided moral hazard. We show that the same informal governance mechanisms that are theorized in models of one-sided moral hazard can be used to support cooperation by both parties in a long-term exchange relationship characterized by two-sided moral hazard. We apply our model to explain cooperation by both franchisor and franchisees across franchise systems that vary in the degree of multiunit franchising. In our analysis, multiunit franchising serves to establish a relational contract in which cooperation by both parties is better supported than it is under singleunit franchising. In addition, whereas relational contracting models have been rarely tested empirically, we find empirical evidence for our model in litigation and other data from 114 franchise systems. In particular, we show using instrumental variables estimations that multiunit franchising leads to greater cooperation by both franchisors and franchisees.