Contractual Disputes and the Channels for Interfirm Communication

William Pyle

The Journal of Law, Economics, and Organization, 2005, vol. 21, issue 2, 547-575

Abstract: Interfirm information exchange as to the reliability of trade partners supports the development of markets by mitigating information asymmetries and providing the basis for relational contracting. While this general point has been made in a variety of contexts, most of the literature analyzes only a single channel or institutional mechanism that firms in a particular environment have for disseminating relational information. That is, some researchers have focused on the importance of informal communication within a group or network of firms; others have concentrated on the role of a formal organization that helps bring about or mediate this information flow. This article makes a contribution to this literature by exploring the interaction of formal and informal mechanisms as determinants of relational information flows. Specifically, we explore whether membership in a formal organization, a business association, contributes to interfirm communication about disputes with trade partners if firms already communicate informally. Based on evidence from five transition countries, we find that the role of business associations in this regard is in some circumstances statistically and economically significant, even when controlling for the level of preexisting interfirm communication. Notably we find that the marginal value of business associations can be particularly important when the transacting parties are in different cities; in this case, the probability that information of a firm's dispute with a client becomes known to the client's other suppliers increases by 18%. In addition, we find that the role of business associations in promoting relational information flows is sensitive to the degree of local competition in their members' markets. We also confirm that firms that already engage in regular informal communication with trade partners are much more likely to have news of their disputes disseminated and we show how the flow of relational information is sensitive to a firm's institutional environment and specific features of a bilateral relationship in which a dispute might arise. Copyright 2005, Oxford University Press.

Date: 2005
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