We extend the literature on contractual governance with an asymmetric view of contractual design. Specifically, we distinguish between the absolute and relative levels of contractual complexity. We suggest that when facing exchange hazards, firms may fortify their own protection not only by bolstering contractual provisions in their favor but also by reducing contractual provisions in favor of the partner. In this regard, the relative level of contractual complexity, as opposed to the absolute level of contractual complexity, can better reflect the contracting choices that firms make to protect themselves against exchange hazards. The results from a study of disclosed documents and contracts on 136 franchise systems in the U.S. largely support our arguments.
Academy of Management Proceedings, Academy of Management.