Institutions that fairly distribute benefits, costs, and risks within a market-based economic system reinforce the social contract on which that system is built. When institutions fall short in addressing horizontal inequalities (across identity groups), social and political conflicts escalate. Using tools and constructs from social networks as a meeting point for insights from a range of fields and disciplines that examine institutional evolution in conflict systems, we develop theoretical arguments linking the structural characteristics of firms’ relationships with stakeholders—the degree of structural balance, the salience of societal faultlines, and the degree of local network closure—to the local system’s institutional capacity to manage horizontal inequalities. When the structure of firm-stakeholder relationships promotes (inhibits) information flow, trust, norms of reciprocity, and intergroup coordination, the institutional capacity to manage horizontal inequalities increases (decreases). We thereby show that the distributional function of institutions is not exogenously determined, but endogenously shaped at least in part by firms-stakeholder relationships. If the declining trust in market-based systems stems in part from their failure to distribute benefits, costs, and risks fairly, then reversing this trend requires a reorientation of firm-stakeholder relationships in a manner that increases the relational embeddedness of the private sector with its stakeholders.