Resolutions, Recoveries and Relationships: The Evolution of Payment Disputes in Central and Eastern Europe

What determines the mechanism chosen to resolve a commercial dispute? To what degree does the aggrieved recover damages? And does the relationship survive in the aftermath? The answers to these questions affect expectations as to the costs of transacting and, thereby, the development of markets. But they have received almost no attention in the economic literature on the post-socialist transition. This article exploits a rich survey of small and medium-sized manufacturing enterprises in three Central and East European countries to explain responses to an inter-firm payment dispute. The evidence suggests that behavior at successive stages is strongly influenced by the transaction costs associated with greater geographic distance between the firms. The evidence also strongly suggests that the costs of a dispute can be mitigated by membership in a business association. JEL classification: D23, D74, K40, K41, P37