This article examines a reciprocal exchange mechanism for sustainable franchisor-franchisee relationships consistent with the perspective of social exchange theory. We develop a stage-based contract along with an ESG effort threshold to characterize the franchisor’s ESG efforts and total earnings shares when both parties in the franchising system could evaluate the franchisor’s compliant behavior. We posit and test relationships between total earnings share, ESG effort threshold, and ESG efforts across the early stage followed by the later stage of the franchise. The empirical findings enable us to offer theoretical and practical implications for writing two-stage contracts involving sustainable franchisor-franchisee relationships based on the ESG efforts and economic returns across the two stages.
