Let's Work It Out (or We'll See You in Court): Litigation and Private Dispute Resolution in Vertical Exchange Relationships

What is it about?

In this paper with Joanne Oxley (Rotman School of Management – University of Toronto), we examined 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 leveraged findings from law and economics to offer a novel organizational perspective on litigation and private dispute resolution, and we developed hypotheses about the likelihood of litigation in different exchange settings. Our empirical analysis generated three sets of new findings: First, counter to the received wisdom, we saw that the involvement of lawyers did not necessarily signal the bitter end of an exchange relationship, because firms frequently manage to avoid litigation and resolve their disputes privately, and they do so in a manner that accords with our theoretical predictions. Second, we saw that familiarity with exchange partners does not automatically lead to an 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 saw that the firms’ willingness to work things out privately was 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 they thus inject important new evidence into ongoing discussions about the legal underpinnings of different governance forms.

Featured Image