Russian Journal of Economics and Law (Jun 2018)
An autopsy of cooperation: diamond dealers and the limits of trust-based exchange
Abstract
Objective: to consider the causes and conditions which have led to the breakdown of trust between diamond dealers and the industry arbitration system, to reveal the features of limitation of reputation-based exchange.Methods: dialectical approach to the cognition of social phenomena, enabling to analyze them in their historical development and functioning in the context of a set of objective and subjective factors, which determined the choice of the following research methods: formal-logical, comparative-legal, sociological.Results: the paper assesses recent changes in diamond industry. It is observed that growing distrust has eroded the industry’s foundations for reputation-based exchange, and the industry now exhibits growing uncooperative behavior. The breakdown of cooperation has even eroded trust in the industry’s system of private arbitration in the New York's DDC. The paper then identifies several economic forces that have reduced the economic gains from cooperation and, reciprocally, enhanced the economic attractiveness of untrustworthy behavior: changes in diamond production has increased wholesale prices, changes in Internet retail sales have decreased retail prices, and thus intermediary diamantaires suffer from reduced profits. Additionally, the emergence of Indian diamond business has intensified competition among diamond intermediaries, thus further reducing profit opportunities. Indian entry has been fueled, in part, by the availability of state-sponsored credit, and both overexpansion and incipient bankruptcies have resulted. The loss of trust and growing unreliability of reputation-based exchange has precipitated further industrial restructuring, with diamond firms integrating vertically to avoid the traditional supply chain from intermediaries. These changes, and the continued the attrition of trust, signal significant changes to the historic and iconic industry. Scientific novelty: for the first time, the paper substantiates the necessity to rethink what has become the prevailing under- standing of cooperation and dispute resolution in the diamond industry, and to reconceptualize the economics of the diamond chain. Consistent with transaction cost economics, the authors observed that trust-based relationships and vertical integration are substitutes for each other, and that vertical integration takes hold when trust breaks down.Practical significance: the main provisions and conclusions of the article can be used in scientific, pedagogical and law-enforcement activities in considering the issues related to legal regulation of diamond industry.
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