Outsider Use of Insider Norms

In <i>Order Without Law: How Neighbors Settle Disputes</i>, Robert Ellickson famously argues that disputes between members of a close-knit group are resolved with relatively low transaction costs because parties rely upon norm-based procedures to reach resolution. Conversely, he hypothesizes that transaction costs increase when disputes arise among strangers, because the lack of informal resolution strategies requires reliance upon costlier, formalized legal systems. This intuition is solidified in Lisa Bernstein’s work on extralegal norms, which demonstrates that transaction costs increase when members of a close-knit group deal with third parties. These articles reflect the prevailing view that transaction costs are higher in dispute resolutions between strangers as compared with those amongst members of the same close-knit group, because strangers will rely upon formal, legal means of resolution. This account fails to consider that outsiders might strive to mimic the existing extralegal dispute resolution processes used by a close knit group, by attempting to act as an insider. This paper explores whether outsiders follow social norms, instead of formalized legal processes, because they believe doing so can produce a favorable result more cheaply. It predicts that outside actors pursing a controversial objective in close-knit communities will seek to reduce transaction costs by intentionally engaging norm-based dispute resolution methods used by insiders if four factors are in place: (1) the goals of the parties align, (2) the parties share knowledge of the same social norms, (3) the parties intend to engage in repeat transactions, and (4) the parties are uncomfortable with formal legal channels. To study this hypothesis, I return to Ellickson’s Northern California and present a case study illustrating a sophisticated third party attempting to use informal processes to resolve a dispute with members of a close-knit community. In 2000, the legally-unsophisticated town council of rural McCloud, California contracted to lease water rights to Nestlé, the largest food and beverage manufacturer in the world. The resulting contract was legally enforceable as an options contract, in which Nestlé had the exclusive, unilateral right to withdraw. There was, however, fierce opposition to the deal by the McCloud Watershed Council, which was created to block the Nestlé plant from coming to McCloud. Considerable controversy ensued. In its attempts to resolve the dispute, Nestlé eschewed formal channels of legal resolution and instead attempted to use the norm-based methods of resolution long relied upon by residents of the small town. In contrast, the McCloud Watershed Council pursued formal legal channels to obtain its goal and, ultimately, succeed in preventing Nestlé from establishing the plant. This paper presents the McCloud water bottling dispute as a case study of outsiders attempting to achieve controversial goals in a close-knit community; it makes the novel contribution of demonstrating that outsiders sometimes seek to use the social norms of close-knit groups, and provides a framework for understanding when outsiders use insider norms.