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Document Type

Article

Publication Date

Summer 2015

Publication Citation

90 Indiana Law Journal 1177 (2015)

Abstract

One of the most vital debates in franchise law focuses on whether state or federal law should adopt “good-cause statutes” (GCSs), which require franchisors to show good cause before terminating contractual relations with a franchisee. The traditional law-and-economics analysis suggests that GCSs are inefficient. This inefficiency argument is based upon one central hypothesis: GCSs increase franchisee free riding since they limit the franchisor’s ability to terminate the franchise contract easily. The free-riding hypothesis has been significantly influential in the development of franchise law, as is evident in state and federal statutory regimes. To date, the majority of states and the federal government have refused to adopt GCSs.

This Article investigates the free-riding hypothesis empirically and finds it wanting. Direct examination of consumer satisfaction in one of the industries most notoriously susceptible to free riding—hotels serving nonrepeat travelers—shows no significant differences between franchises subject to “at-will” laws and those subject to a GCS. We gathered a sample of 3442 franchised hotels, measured each one along several dimensions of quality, and assessed potential differences using multiple econometric methods. In none did the at-will states outperform the good-cause ones.

Implications of our empirical results on the debate over GCSs are discussed in this Article.

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