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Sustainability and Implicit Contracts

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  • Misani, Nicola

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.

Suggested Citation

  • Misani, Nicola, 2020. "Sustainability and Implicit Contracts," MPRA Paper 104963, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:104963
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    Cited by:

    1. Angeloantonio Russo & Stefano Pogutz & Nicola Misani, 2021. "Paving the road toward eco‐effectiveness: Exploring the link between greenhouse gas emissions and firm performance," Business Strategy and the Environment, Wiley Blackwell, vol. 30(7), pages 3065-3078, November.

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    More about this item

    Keywords

    contract theory; trust; stakeholder theory; benevolence; integrity; long term;
    All these keywords.

    JEL classification:

    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • L21 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Business Objectives of the Firm
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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