Traditional principal agent theory interprets franchising as a solution to the agency problems associated with incentives and observability. Franchising has been viewed as an institution that aligns the right to make decisions with the residual claims deriving from these decisions. One problem associated with this explanation, is that in institutions like franchise systems or firms, the relevant players are partners interact quit often. Therfore reciprocity plays an important role. The succes of those institutions substantially hinges on their ability to strengthen the cooperative behavior of "insiders" and to keep out opportunistic "outsiders" that destroy cooperation. While "traditional" principal agent theory has developed powerful models to explain theoretically various provisions of franchise contracts, there is a problem in explaining the non-use of opportunities for behaveing opportunistically. This paper reviews some relevant empirical findings on the "underprovision" of opportunistic behavior in franchising, that are not compatible with principal-agent explanation of this organizatinal form. These findings relate to rent leaving to franchisees, the stability of contractual provisions over time, reliance on royalities from sales and the parallel use of company owned outlets and franchises in one system (the so-called plural form). To explain these discrepancies between the cooperative reality of a good franchise system and the design of franchise contracts (which is used to prevent opportunistic behavior), a "cooperative" interpretation of franchising as an organizational system is given. It is illustrated that the careful selection of franchisees enables a cooperative semiclosed entity in an opportunistic environment. Here cooperative behavior is enhanced by repeated interaction, reciprocity and the "right" incentives for investment for implicit knowledge