Law Commons^™

The literature on contract theory expects parties to use incentive mechanisms that minimize the costs of verifying breach in court if these mechanisms can effectively deter breach. This paper tests this hypothesis about relational governance in the context of franchising, an organizational form that provides parties with a suite of governance choices that span the range from those that require little or no verification to those that entail expensive and uncertain litigation. While relational governance options may be inexpensive, they may not be as effective as using incentives that require enforcement of written contracts, such as the threat of contract …