From rigidity to adaptability: strategic contract design and incentives for governing franchisee behavior across relationship stages

Purpose The purpose of this study is to investigate how contract characteristics and incentive structures shape franchisor monitoring and, in turn, influence franchisee compliance and opportunism. The authors examine the moderating effect of the relationship stage, early and late, on the relationship between contract characteristics and franchisor monitoring and its downstream effects on franchisee behavior. Design/methodology/approach The hotel industry served as the empirical context. The authors surveyed branded hotel franchisee managers representing ten sub-brands of a hotel group. The final matched sample comprised 201 franchisees from the USA and China. Findings Contract ambiguity increases both behavior and output monitoring, particularly in early-stage relationships. Behavior monitoring enhances compliance and reduces opportunism during this stage. Multi-unit-based incentives reduce both types of monitoring, while long-term incentives specifically reduce behavior monitoring. Contract completeness lowers output monitoring. A post hoc analysis reveals different governance patterns between the USA and China, potentially reflecting variations in institutional or relational norms. Originality/value This study advances franchising research by positioning contract ambiguity as a mechanism for interpretive flexibility in governance. This study also distinguishes the effects of incentive timing and type on franchisor monitoring. Importantly, this study shows how the relationship stage moderates the effects of contract characteristics on monitoring and, in turn, on franchisee behavior. These insights offer a more nuanced and developmentally sensitive view of franchise governance.