Dispute Resolution in Vertical Exchange Contracts
Abstract: Scholarly interest in private settlement of contract disputes has generated a rich body of theory but relatively few empirical studies. We address this gap by exploiting a unique dataset capturing actual dispute resolution procedures in a sample of contract disputes between vertical exchange partners. We observe the highest rates of private dispute resolution in disputes involving either the simplest contracts or the most complex contracts in our sample. We argue that this pattern is consistent with a combination of motivations for private resolution: cost-avoidance for simple disputes, and enhanced flexibility for disputes involving particularly complex contracts. We also compare different private dispute resolution procedures and find that arbitration is in some respects closer to litigation and in other respects closer to mediation or negotiation. Our findings are consistent with the argument that disputing firms are able to effectively educate arbitrators and mediators in a way that is not feasible for judges in a court of law
