Sustainability and Implicit Contracts

Nicola Misani

MPRA Paper from University Library of Munich, Germany

Abstract: Implicit contracts are “invisible handshakes” that are not legally binding but are grounded in mutual understanding between the parties of what they expect from each other. These contracts are very common both within the firm (e.g. between managers and employees) and in business relationships (e.g. between a firm and its suppliers). Typically, implicit contracts arise in rela-tionships that are in some way open-ended. An extensive literature has showed that implicit contracts allow firms to create value by encouraging relationship-specific investment and moti-vating effort by stakeholders. This chapter focuses on how sustainability satisfies existing im-plicit contracts (including a broad social contract with society at large) and facilitates a firm in entering new implicit contracts by improving its trustworthiness. I argue that the adoption of sustainability is directly related to industry- and firm-level variables that make implicit contracts important to a firm’s strategies, and inversely related to the strength of overriding factors that make a firm trustworthy. Based on this reasoning, I analyse four areas in which rates of sus-tainability adoption can vary according to the importance of implicit contracts.

Keywords: contract theory; trust; stakeholder theory; benevolence; integrity; long term (search for similar items in EconPapers)
JEL-codes: L14 L21 M14 (search for similar items in EconPapers)
Date: 2020-02-17
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Forthcoming in Sustainability Business and Society 360.4(2020): pp. 81-97

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:104963

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