WORKING TOGETHER AND WORKING IT OUT: Dispute Resolution in Repeated Vertical Exchange Relationships

In this paper we explore the impact of relational history on firms’ willingness to “work things out” in subsequent agreements, by examining the way that contract disputes between partners in vertical exchange relationships are actually resolved. Counter to the received wisdom we find no evidence of an automatic preference for private dispute resolution (negotiation, mediation or arbitration) among repeat transactors, relative to those in new exchange relationships – the act of working together does not appear to increase exchange partners’ ability to work things out in all instances. We do find, however, that when there is evidence of the existence of cooperative norms in previous dealings between the partners, the outcome of subsequent disputes is significantly less likely to be a court-rendered judgment. In cases when previous interactions are described in negative terms disputes are just as likely to end in litigation as if they were new partnerships. Indeed, there is some slight evidence here of a higher propensity to turn to the courts for compensation when continued conflict undermines familiarity-based trust. We discuss these findings and suggest implications for the theory and management of vertical exchange relationships.