This study empirically investigates the dynamics and outcomes of leader-member conflict. It validates the values of cooperative conflict and damages of competitive conflict between leaders and employees, testing the effectiveness and universality of Deutsch's (1973) cooperation and competition theory. By bridging leadership and conflict management literature, it also identifies the role of transformational leadership in managing conflict effectively. Specifically, transformational leadership induces cooperative conflict and undermines competitive conflict between leaders and employees, which in turn increases task performance and leader effectiveness. A total of 112 interviews were conducted in mainland China from 2010 to 2011. Results of structural equation modeling and other analyses support the proposed model that transformational leadership affects conflict management approaches (cooperative conflict management, competitive conflict management) that in turn influence outcomes (task performance, leader effectiveness). Our findings suggest practical implications that leaders and employees can benefit from well-managed conflict, and that leaders can use transformational values and skills to handle conflict successfully in organizations.