Implicit Contracts and the Theory of the Firm

41 Pages Posted: 30 Aug 2000 Last revised: 18 May 2001

See all articles by George P. Baker

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; USC Gould School of Law

Date Written: September 1997

Abstract

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. "

Suggested Citation

Baker, George P. and Gibbons, Robert S. and Murphy, Kevin J., Implicit Contracts and the Theory of the Firm (September 1997). NBER Working Paper No. w6177. Available at SSRN: https://ssrn.com/abstract=225935

George P. Baker (Contact Author)

HBS Negotiations, Organizations and Markets Unit ( email )

Soldiers Field
Boston, MA 02163
United States
617-495-6119 (Phone)
617-496-4191 (Fax)

HOME PAGE: http://www.people.hbs.edu/gbaker/index.html

National Bureau of Economic Research (NBER)

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Robert S. Gibbons

Massachusetts Institute of Technology - Sloan School and Department of Economics ( email )

E52-432
MIT
Cambridge, MA 02142
United States
617-253-0283 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Kevin J. Murphy

University of Southern California - Marshall School of Business ( email )

BRI 308, MC 0804
Los Angeles, CA 90089-0804
United States
213-740-6553 (Phone)
213-740-6650 (Fax)

USC Gould School of Law

699 Exposition Boulevard
Los Angeles, CA 90089
United States

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