Contracts, Extracontractual Incentives, and Ex Post Behavior in Franchise Channel Relationships

Grounded in agency theory, this study examines how franchisors' ex ante contracts and extracontractual incentives influence their ex post monitoring and enforcement efforts and how combinations of the ex post governance mechanisms drive franchisee behavior. Integrating three archival data sources and a survey of 206 franchisees across eight automotive brands, the authors find that franchisor reliance on contractual completeness appears to result in reduced ex post behavior monitoring and enforcement efforts, while contractual one-sidedness is associated with higher levels of behavior monitoring but reduced enforcement. Extracontractual incentives, when offered to the franchisee, are associated with increases in monitoring and enforcement. In isolation, franchisor monitoring and enforcement efforts are ineffective in eliciting desired franchisee behaviors. However, different combinations of franchisor monitoring and enforcement efforts affect franchisee compliance and opportunism, sometimes with counterproductive results. The study provides an initial baseline of understanding on how ex ante governance characteristics and combinations of ex post governance mechanisms function to facilitate or deter franchisee compliance and opportunism.