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.