THE ECONOMICS OF LITIGATION AND ARBITRATION:
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.
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Presentation and Publication Information:
To be announced.