What is implicit contract theory?

Implicit contract theory is a term used in economics, attempting to explain why there are redundancies and layoffs instead of price adjustments/decreases in wages in the labour market during a recession.

Where have you heard about implicit contract theory?

The implicit contract theory has been widely discussed and studied by various labour economists over the years. An example is the American economist Sherwin Rosen, who penned the book 'Implicit Contract Theory' in 1994.

What you need to know about implicit contract theory.

The term implicit contract theory derives from the term 'implicit contracts', which refers to long-term agreements between two parties on the exchange of goods and services (employment, for example). Implicit contracts can be a written or tacit agreement. Implicit contract theory generally suggests that performance varies from employee to employee, and that performance in many jobs needs to be measured in order to contain costs. It also suggests that performance ratings should be adjusted for factors outside an employee's control.