Sustainability and Implicit Contracts

Misani, Nicola (2020): Sustainability and Implicit Contracts. Forthcoming in: Sustainability , Vol. 4, No. Business and Society 360 (1 June 2020): pp. 81-97.

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: contract theory; trust; stakeholder theory; benevolence; integrity; long term
• Subjects: L - Industrial Organization > L1 - Market Structure, Firm Strategy, and Market Performance > L14 - Transactional Relationships ; Contracts and Reputation ; Networks; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L21 - Business Objectives of the Firm; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M1 - Business Administration > M14 - Corporate Culture ; Diversity ; Social Responsibility

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