Author granted license

Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International

Document Type

Article

Publication Date

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.

Comments

Boston University School of Law Working Paper Series, Law and Economics Working Paper No. 01-03

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