Reputation Flows: Contractual Disputes and the Channels for Inter-firm Communication

Abstract

Inter-firm information exchange with respect to the reliability of trade partners may be unmediated in the sense that it involves direct communication between the personnel of two firms. Alternatively, this information flow may be channeled by or through an organization such as a trade association. We assess the relationship between these two mechanisms for conveying reputational information. Based on evidence from five transition countries, we find that trade associations' role as informational intermediaries in this regard is sensitive to the geographic relationship between a potential supplier (demander) of reputational information and the firm whose behavior may be reported (acquired). What is more, the use of trade associations as conduits for reputation flows seems to be more strategic than the use of unmediated communication in that it is highly sensitive to the effects of market structure.

Resolutions, recoveries and relationships: The evolution of payment disputes in Central and Eastern Europe

“…In addition to Poland, Slovakia and Romania, they have data for their variables of interest from Russia and Ukraine. 5 The results are presented formally for five countries in Pyle (2005) but they are robust to a consideration of the data from only Poland, Romania and Slovakia. Subsequent outcomes, e.g., recovery of damages and the endurance of the relationship, have not been studied thoroughly for the CEE region.…”

“…However, they may influence resolution indirectly. Pyle (2005) shows that, after controlling for the degree of pre-existing communication with other firms, association members in these three CEE countries are more likely both to publicize their trade partners' transgressions and to learn about any disputes between their partners and other firms. 5 Hence, associations facilitate the sharing of information and give members access to a mechanism for imposing reputational sanctions.…”

“…This relationship is shown in column 3 to be even stronger if we restrict the disputes to the subset that comprises parties that are located either in the same city or are otherwise relatively close to each other. Pyle (2005) finds that business associations in transition countries enhance existing relational information flows with respect to non-local, domestic clients. Hence, in column 2, we add an interaction term that takes on the value of one if the respondent is a member of a business association and had its most recent payment dispute occur with a firm located in the same country but in a region other than that of the respondent.…”

“…This finding contradicts the conventional wisdom in World Bank (2002) that, with respect to contract disputes, business organizations are only a substitute for public enforcement mechanisms. Recalling that Macaulay (1963), Doner and Schneider (2000), Pyle (2005), and Woodruff (1998) provide evidence that associations contribute to interfirm communications about problematic clients, it is likely that they also facilitate the exchange of other types of information including advice on how to access and utilize effectively the court system. An alternative explanation for the positive association between membership in a business organization and the use of the courts is the unjust influence that associations may wield over the legal process on behalf of their members.…”

“…A contemporary analog to these historical institutions is the business association, which is a non-commercial organization designed to promote the general interests of members. Such associations may support the expansion of markets by improving inter-firm information flows, e.g., those related to relational contracting, as Doner and Schneider (2000), Macaulay (1963), Pyle (2005) and Woodruff (1998) discuss. 1 Better institutions encourage firms to engage in transactions that they might have otherwise avoided.…”