Unnatural Relationship Dissolution in Franchise Relationships: A Dual-Agency Perspective

Project: Research

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Franchise relationships are prone to premature termination. With a whopping 122 percentturnover rate over the last four years from the end of 2010 to the end of 2013(FranchiseGrade.com 2013), many franchise relationships do not reach their franchise contracts’maturity date, let alone having their franchise license renewed. Among these rupturedrelationships, some of them are terminated as a result of completed transaction or mutualagreements (Zhang, Griffith, and Cavusgil 2006), whereas some others are terminatedunilaterally prior to the completion of the contract. In our study, we define the latter kind ofpremature, unilaterally initiated relationship termination as unnatural relationship dissolution.Given the frequency and high psychological and economic stakes involved in such relationshipdissolution, it is surprising to see that most marketing research has remained on the sidelines inunderstanding the dynamics involved in this process (Payan et al. 2010).This project seeks to fill this research gap by examining the antecedents of and outcomesattributable to unnatural relationship dissolution. Extending prior literature on agency theory anddouble-sided moral hazard (Bergen, Dutta, and Walker 1992; Bhattacharyya and Lafontaine1995), we argue in our study that both the franchisor and the franchisee act as the principal andthe agent to each other simultaneously (dual-agency), and incentives exist for both tomisrepresent themselves before the relationship is formed (adverse selection) and to behaveinappropriately after the transaction has taken place (moral hazard) (Antia, Zheng, and Frazier2013). Such double-sided adverse selection and moral hazard can be the very causes of unnaturalrelationship dissolution. These relationships, however, are weakened by the franchisor’s crediblecommitment to the specific franchise relationship as well as the regulatory statues that are tosafeguard the interest of individual franchisees. The outcomes for unnatural relationshipdissolution may be a double-edge sword from the franchisor’s perspective, depending on whoinitiates the premature relationship termination. Initiated by the franchisor, such actions may helpthe franchisor “cleanse” the franchise system and better allocate resources to realize systemgrowth objectives.We will test the hypothesized linkages within the context of business format franchising.The context is chosen because the mutual reliance of the franchisor and franchisee makes for asuitable context for the demonstration of dual-agency relationships. Additionally, due tostringent government requirement, this business format is awash with rich sources of reliablearchival information. The findings of this project will meaningfully advance the research on“unnatural relationship dissolution” in the marketing field.


Project number9042250
Grant typeGRF
Effective start/end date1/01/1618/06/19

    Research areas

  • Relationship Dissolution,Agency Relationships,Double-Sided Moral Hazard,Adverse Selection,