The Crowding Out Effects of Monitoring in Franchise Relationships: The Mediating Role of Relational Solidarity

Abstract

Franchisors monitor their franchisees to ensure that the latters' performance is consistent with the franchise agreement. Though agency theory suggests that monitoring and subsequent corrective action lead to improved performance and reduced opportunism, the psychology literature argues that, in certain circumstances, monitoring can “crowd out” the very behavior it was designed to eliminate (i.e., opportunistic behavior). Our results show that the extent and ease of monitoring reduce the crowding out effects of monitoring, whereas monitoring enforcement heightens these effects. Our findings also show that the exchange norm of relational solidarity fully mediates these effects.

KEYWORDS:

• agency theory
• franchisor/franchisee relationships
• monitoring
• relational norms

Notes

¹We asked each informant to indicate on a seven-point scale (1: not at all knowledgeable; 7: very knowledgeable) the extent to which they were knowledgeable about the franchiser-franchisee relationship (specifically, “How knowledgeable are you about your franchise unit's relationship and dealings with your franchisor?”). Informants who scored less than five on this scale were deemed not knowledgeable enough about the franchiser-franchisee relationship to provide sufficiently valid reports.

*p < .05; **p ≤ .10.

^a Standardized coefficients/unstandardized coefficients, with significant effects (p ≤ .05) shown in bold.

^b Correlations among latent exogenous constructs.

²The literature considers the forms of monitoring to be output and behavioral monitoring (Anderson & Oliver, 1987). Output monitoring uses outcome measures of performance, for example, the number of units sold relative to sales quota, in deciding allocation of reward. Behavioral or process monitoring assesses agent behavior “… in terms of activities that are thought to lead to a given outcome” (Jaworski & MacInnis, 1989, p. 408). Studies such as Bello and Gilliland (1997) and Heide et al. (2007) are among the few that differentiated these two forms of monitoring and investigated their outcomes in interfirm settings.

^a All the items used a 7-point scale (1 = strongly disagree, 7 = strongly agree).

^b *Measurement item that has been dropped as a result of measurement analyses.

^c†Log-transformed due to non-normality prior to confirmatory factor analysis.