Contracting Beyond the Market: Property Rights, Externalities, Historical Conflict, and Contractual Agreements Between Firms and Nonmarket Stakeholders
Abstract: Despite firms’ growing engagement of nonmarket stakeholders—such as local communities and nongovernmental organizations—there has been little research on the emergence of contractual agreements between firms and nonmarket actors. Given that a very large number of such contracts are theoretically possible but only a small number exist, we seek to understand what factors explain the use of contracts to govern some firm-stakeholder relationships but not others. We ground our inquiry in transaction cost economics, which views governance as a means to infuse order into a relation where potential conflict threatens value creation. We propose that the property rights, externalities, and history of conflict that define the relationship between a firm and a nonmarket stakeholder influence the potential for conflict between them and therefore the probability of a contract to govern their relationship. We collect novel data on the location and relationships between indigenous communities and mining firms in Canada to identify a plausible exhaustive set of indigenous communities “at risk” of signing a contract with a mining firm. We measure the three factors defining the relationship between a firm and a local community by relying, respectively, on historically assigned property rights over a mining area, the mine-community colocation in a watershed, and archival records of protests and lawsuits. We find support for our propositions by examining which of the 5,342 dyads formed by 459 indigenous communities and 98 firms signed 259 contracts between 1999 and 2013.