Document Type
Article
Publication Date
6-2003
ISSN
0047-2530
Publisher
University of Chicago Law School
Language
en-US
Abstract
If we define the deterrence benefits from contract enforcement as avoided harms net of avoidance costs, we should expect contracting parties to choose the dispute resolution forum that provides the greatest difference between deterrence benefits and dispute resolution costs for every type of dispute. We apply this general framework to franchise contracts and conduct an empirical analysis of the determinants of arbitration agreements among franchising parties. Although it is obvious that contracting parties have an incentive to choose arbitration in order to reduce dispute-resolution costs, there have been no studies of the importance of deterrence concerns. We examine the deterrence hypothesis here and find a great deal of support for it. Indeed, our results suggest that deterrence factors generally outweigh litigation costs in the design of dispute resolution agreements. We find that the probability of arbitration is significantly higher when the parties are likely to rely on implicit contract terms for governance and compliance with those terms is difficult to ensure.
Recommended Citation
Keith N. Hylton & Christopher R. Drahozal,
The Economics of Litigation and Arbitration: An Application to Franchise Contracts
,
in
32
Journal of Legal Studies
549
(2003).
Available at:
https://scholarship.law.bu.edu/faculty_scholarship/770
Working paper available on SSRN
Included in
Contracts Commons, Law and Economics Commons, Litigation Commons
Comments
Updated with published version of paper on 9/24/22
Working paper available on SSRN