Franchise relationships are subject to agency problems,
whereby incentives exist for both the agent (the franchisee)
and the principal (the franchisor) to misrepresent themselves
and/or their abilities before the relationship begins
(ex ante adverse selection) as well as to renege on their performance
obligations (moral hazard) during the course of
the relationship (Bergen, Dutta, and Walker 1992; Rubin
1978). Franchisors safeguard their interests by designing
and offering relatively complete and one-sided contracts
(Kashyap, Antia, and Frazier 2012) specifying their franchisees'
obligations before, during, and after the relationship.
Although such contracts safeguard the franchisor's
interests well, they remain conspicuously vague about the
latter's performance obligations. Moreover, there is little
room for negotiating the terms of such contracts (Shane
2005). Franchisees may "take it or leave it" and must rely
only on the franchisor's concem for its reputation to serve
as its bond (Klein 1980).