As a sea of oil slops over sand, oysters and pelicans in the Gulf, it seems natural to blame the entity that made this happen– BP . The Gulf disaster could have easily been avoided–from the well design, to the defective seals, to the haphazard response, topped off with the lack of any backup plan. It doesn’t help that BP is a big, rich, oil company. The company will likely be sued and castigated in courts and markets.

Abstract

Economic theorists argue that broad termination rights allow franchisors to police opportunism on the part of franchisees which have an incentive to free ride on the franchised trademark. However, in principle, these termination rights could generate another form of opportunism as franchisors then have an incentive to skim establishments that prove to be particularly profitable. We use the adoption of state franchise termination laws to determine which form of opportunism is more important on the margin. Using panel data on fast food establishments, we find that laws restricting franchisor termination rights lead to a reduction in franchising, and this reduction is not offset by the concomitant increase in franchisor-operated establishments. We also examine state employment rates in industries characterized by high rates of franchising relative to other industries where franchising is rare, finding that employment in franchise industries drops, as a proportion of total employment, by about 7 percent when states enact restrictions on franchisor termination rights. Both sets of results imply that the potential for franchisee opportunism is stronger, and restrictions on termination rights are likely to reduce joint surplus among franchisors and franchisees.