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

Ilir Hajdini () and Josef Windsperger ()
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Ilir Hajdini: University of Vienna
Josef Windsperger: University of Vienna

European Journal of Law and Economics, 2020, vol. 50, issue 2, No 6, 313-337

Abstract: 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.

Keywords: Transaction cost theory; Real options theory; Explicit call options; Franchising (search for similar items in EconPapers)
JEL-codes: D23 D86 L14 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10657-020-09665-3

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