Legally Charged: Embeddedness and Profits in Large Law Firms

We examine how forms of a firm's embedding in market relationships affect the size of its spreads – i.e., the difference between the selling price and production costs of its goods and services. Building on Harrison White's work on the relational underpinning of market behavior, we argue that the embeddedness of market transactions in social structures furnishes actors with private information and informal governance benefits that shape spreads by adding unique value to transactions and by revealing the price sensitivity of clients. We propose arguments about how a firm's embedded client relationships, interlock ties, and status influence the size of its spreads. Using longitudinal 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 significant effects on spreads and that the effects change in scale and direction, depending on the form of embeddedness.