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Real options in franchise contracting: an application of transaction cost and real options theory

Author

Listed:
  • Ilir Hajdini

    (University of Vienna)

  • Josef Windsperger

    (University of Vienna)

Abstract

Previous research has not explained the use of real option clause in franchise contracting. The real option clause has two economic functions: To reduce transaction costs by mitigating opportunism risk and to increase strategic rents by exploiting the profit potential from future upside opportunities under uncertainty. We argue that franchisors will more likely use a real option clause (ROC) in franchise contracts under high behavioral uncertainty, high franchisors’ transaction-specific investments relative to franchisees’ and long contract duration. In addition, by combining transaction cost theory and real option theory, our study provides a new explanation for the impact of environmental uncertainty on the use of ROC in franchise networks by showing that there exists a U-shaped relationship between environmental uncertainty and the franchisor’s use of ROC. Overall, the data from German and Swiss franchise systems provide support of the research model.

Suggested Citation

  • Ilir Hajdini & Josef Windsperger, 2020. "Real options in franchise contracting: an application of transaction cost and real options theory," European Journal of Law and Economics, Springer, vol. 50(2), pages 313-337, October.
    • Handle: RePEc:kap:ejlwec:v:50:y:2020:i:2:d:10.1007_s10657-020-09665-3
    DOI: 10.1007/s10657-020-09665-3
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    References listed on IDEAS

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    More about this item

    Keywords

    Transaction cost theory; Real options theory; Explicit call options; Franchising;
    All these keywords.

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights

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