Implicit Contracts and the Theory of the Firm
George P. Baker
HBS Negotiations, Organizations and Markets Unit; National Bureau of Economic Research (NBER)
Robert S. Gibbons
Massachusetts Institute of Technology - Sloan School and Department of Economics; National Bureau of Economic Research (NBER)
Kevin J. Murphy
University of Southern California - Marshall School of Business; University of Southern California - Department of Economics; USC Gould School of Law
NBER Working Paper No. w6177
We analyze the role of implicit contracts' (that is, informal agreements supported by" reputation rather than law) both within firms, for example in employment relationships between them, for example as hand-in-glove supplier relationships. We find that the optimal" organizational form is determined largely by what implicit contracts it facilitates. Among other" things, we also show that vertical integration is an efficient response to widely varying supply" prices. Finally, our model suggests why management' (that is, the development and" implementation of unwritten rules and codes of conduct) is essential in organizations. "
Number of Pages in PDF File: 41working papers series
Date posted: August 30, 2000
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