Legal
Charges: Embeddedness and Price Formation in Corporate Law
Brian Uzzi and Ryon
Lancaster
Abstract
A viable sociological theory of economy and society
must address prices, yet sociologists seldom study price formation,
aside from the price of labor. Conventional theory argues that production
costs, public information on quality, and transaction-cost reducing
formal agreements shape prices. As a point of departure to this
theory, we argue that the embeddedness of market transactions in
social structures furnishes actors with private information and
informal governance benefits that shape prices by adding unique
value to transactions. In making our claims, we use theory and original
fieldwork to propose arguments about how a law firm's embedded client
relationships, brokerage ties between clients, and status influence
the prices it charges to its large business clients. We then statistically
test the generalizability of our arguments for both customized upscale
legal work and "pure vanilla" commodity work, two key
segments of the market that vary in the level of exchange uncertainty.
Using data on the economic and sociological characteristics of law
firms that represent the Fortune 200 corporations and top 250 financial
firms in America, we find that social structure has dramatic effects
on the pricing of custom work and commodity work; effects that change
in scale and direction depending on the form of embeddedness.
Brian Uzzi, Kellogg
Graduate School of Management and Department of Sociology, Northwestern University
Ryon Lancaster, Kellogg Graduate School of Management
and Department of Sociology,
Northwestern University
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