Effects of Contractual Characteristics on Franchisees’ Compliance and Opportunism in Franchise Relationships

This study analyzes the impact of franchise contracts on franchisee behavior, through ex-ante control means used by the franchisor for monitoring, as well as ex-post governance mechanisms, based on agency theory. In addition, we verified if goal incongruity affects the monitoring of franchisee behavior. This paper demonstrates that franchise contracts and additional incentives offered by franchisors impact their monitoring and enforcement efforts, and that ex-post governance mechanisms of franchises influence franchisee behavior. This study is notable as it integrates archival data of 634 brands provided by the Korea Fair Trade Committee alongside survey data from 1,108 franchisees in eight business sectors, including chicken, pizza, cafe, education, laundry services, auto repair services, beauty/barber salons, and convenience stores. The findings indicate that thorough franchise contracts decrease output monitoring, while one-sided franchise contracts increase behavior monitoring. The study reveals that output monitoring increases compliance actions and decreases opportunistic actions. This article bolsters the main discoveries on franchise relationships by Kashyap, Anita, and FRAZIER (2012) and Kashyap and Murtha (2017). The results suggest that franchisees should receive adequate feedback with monitoring. Additionally, the franchisor must aim to eliminate or reduce any inconsistencies in goals between the franchisee and franchisor to facilitate proper monitoring. This means that decreasing one-sidedness and increasing completeness would lower any disputes between the franchisor and franchisee during the monitoring process.