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Let’s work it out (or we’ll see you in court): litigation and private dispute resolution in vertical exchange relationships

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  • Lumineau, Fabrice
  • Oxley, Joanne

Abstract

We examine how partners in vertical exchange relationships actually resolve disputes that are sufficiently serious to get lawyers involved. Reaching beyond the usual domain of organizational and management research we leverage findings from law and economics to offer a novel organizational perspective on litigation and private dispute resolution, and develop hypotheses about the likelihood of litigation in different exchange settings. Our empirical analysis generates three sets of new findings: First, counter to the received wisdom we see that the involvement of lawyers does not necessarily signal the bitter end of an exchange relationship, as firms frequently manage to avoid litigation and resolve their disputes privately, and do so in a manner that accords with our theoretical predictions. Second, we see that familiarity with exchange partners does not automatically lead to increased willingness to work things out: rather, our empirical results suggest that the impact of exchange duration on parties’ willingness to resolve disputes privately is contingent on the development of norms of cooperation; in the event that such norms do not develop, the probability of a litigated outcome actually increases over time. Finally, we see that firms’ willingness to work things out privately is also influenced positively by the shadow of the future. These findings are suggestive of a “discriminating alignment” between exchange characteristics and the choice of dispute resolution procedure, and thus inject important new evidence into ongoing discussions about the legal underpinnings of different governance forms.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38361.

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Date of creation: 2012
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Handle: RePEc:pra:mprapa:38361

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Keywords: Contracts; Dispute resolution; Litigation;

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  1. Farrell, Joseph & Maskin, Eric, 1989. "Renegotiation in repeated games," Games and Economic Behavior, Elsevier, vol. 1(4), pages 327-360, December.
  2. Grossman, Sanford J & Hart, Oliver, 1985. "The Cost and Benefits of Ownership: A Theory of Vertical and Lateral Integration," CEPR Discussion Papers 70, C.E.P.R. Discussion Papers.
  3. Klein, Benjamin, 1996. "Why Hold-Ups Occur: The Self-Enforcing Range of Contractual Relationships," Economic Inquiry, Western Economic Association International, vol. 34(3), pages 444-63, July.
  4. Laura Poppo & Kevin Zheng Zhou & Todd R. Zenger, 2008. "Examining the Conditional Limits of Relational Governance: Specialized Assets, Performance Ambiguity, and Long-Standing Ties," Journal of Management Studies, Wiley Blackwell, vol. 45(7), pages 1195-1216, November.
  5. George L. Priest & Benjamin Klein, 1984. "The Selection of Disputes for Litigation," The Journal of Legal Studies, University of Chicago Press, vol. 13(1), pages 1-56, January.
  6. Monteverde, Kirk & Teece, David J, 1982. "Appropriable Rents and Quasi-Vertical Integration," Journal of Law and Economics, University of Chicago Press, vol. 25(2), pages 321-28, October.
  7. Simon Johnson & John McMillan & Christopher Woodruff, 2001. "Courts and Relational Contracts," NBER Working Papers 8572, National Bureau of Economic Research, Inc.
  8. Lumineau, Fabrice & Malhotra, Deepak, 2011. "Shadow of the contract: how contract structure shapes inter-firm dispute resolution," MPRA Paper 38359, University Library of Munich, Germany.
  9. Mattli, Walter, 2001. "Private Justice in a Global Economy: From Litigation to Arbitration," International Organization, Cambridge University Press, vol. 55(04), pages 919-947, September.
  10. Malhotra, Deepak & Lumineau, Fabrice, 2011. "Trust and collaboration in the aftermath of conflict: the effects of contract structure," MPRA Paper 38358, University Library of Munich, Germany.
  11. Ranjay Gulati & Maxim Sytch, 2008. "Does familiarity breed trust? Revisiting the antecedents of trust," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 29(2-3), pages 165-190.
  12. Edward C. Norton & Hua Wang & Chunrong Ai, 2004. "Computing interaction effects and standard errors in logit and probit models," Stata Journal, StataCorp LP, vol. 4(2), pages 154-167, June.
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