Despite firms’ growing engagement of nonmarket stakeholders – such as local communities and nongovernmental organizations – little attention has been devoted to understanding the emergence of contractual agreements between firms and nonmarket actors. Considering 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 and 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, the externalities, and the 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 observing a contract to govern their relationship.

Using novel data on the location and relationships between indigenous communities and mining firms in Canada, we identify a plausible exhaustive set of indigenous communities “at risk” of signing a contract with a mining firm. To measure the property rights, externalities, and historical conflict in the relationship between a firm and a local community we rely, respectively, on historically assigned property rights over a mining area, the mine-community colocation in a watershed, and archival records of protests and blockades. We find support for our propositions by examining which of the 4,414 dyads (formed by 457 indigenous communities and 85 firms) have signed 190 contracts between 1999 and 2013.

Sinziana Dorobantu joined the NYU Stern School of Business as an Assistant Professor of Management and Organizations in July 2012, after completing her Ph.D. at Duke University and a two-year postdoctoral fellowship at the Wharton School at University of Pennsylvania. Her research interests span the areas of nonmarket strategy, global strategy, and political economy. She studies the strategies through which firms build relationships with different stakeholders (local communities, governments, nongovernmental organizations) to gain and maintain support for their operations in different institutional environments. More specifically, she examines how firms engage and govern their relationships with various stakeholders and the extent to which such engagements affect the financial value of these firms. Her research builds on different theoretical traditions and seeks to contribute to our broader understanding of what it takes to obtain and maintain a “social license to operate” in infrastructure and extractive industries.