This lecture will review the basic principal-agent model as it has been applied to analyses of linear contracts, and a number of theoretical extensions. The goal will be to highlight empirical predictions from these models, and compare them to results in the empirical literature on franchising.

In this lecture, we will review much of what is known empirically about the contracting practices that firms rely on to govern their relationships with other firms, in particular the types of relationships that occur within the vertical chain, where one party supplies either an input or a service - often distribution - to the other. We will pay particular attention to the reasons for entering into the observed contractual relationships and the associated costs and benefits and consider both empirical studies of the incidence of contracts --- when different types of contracts and contract terms are chosen --- and empirical analyses of the effects of those choices on outcomes such as profits, prices, sales, and firm survival. We will conclude with a discussion of those aspects of the literature that are in greatest need of new work or new approaches.