In the economy, implicit contracts refer to long-term voluntary and self-coercive agreements between two parties concerning the future exchange of goods or services. The theory of implicit contracts was first developed to explain why there are quantitative adjustments (dismissals) rather than price adjustments (lower wages) in the labour market during recessions. [1] An explicit joint agreement is when a company signs a joint venture agreement or partnership with another company. The agreement outlines the financial roles and interests of each company. Sales and acquisitions of real estate generally include formal contracts. Companies sign explicit agreements with lenders to obtain financing. They also ask customers to sign orders to document an agreement to purchase goods or services. The best way to protect your business from lawsuits and unethical practices is to establish formal contracts for all major business transactions. Local, regional and regional governments lead many implicit agreements through regulations. The relationship between an employer and an employee is generally implicit.

Employers employ someone and expect them to perform duties in exchange for compensation. While companies sign a contract or papers to employees, the employment relationship can be separated from the company at any time, unless it is contrary to labour laws or discrimination. In a particular area, an implicit agreement usually gives way to an explicit contract when it has one. The interpersonal negotiations and agreements in implicit contracts contrast with impersonal and non-negotiable decision-making in a decentralized competitive market. As Arthur Melvin Okun says, a contract market is like an ”invisible handshake” and not an invisible hand. [3] From: Contract implicit in A Dictionary of Economics ” An agreement between the parties on acceptable behaviour that is not part of a formal agreement. Implicit contracts arise in many social situations and have been proposed to explain labour market institutions. Implicit contracts generally evolve over time and build trust between the parties. For example, it has been proposed that Coca-Cola have an implied contract with its consumers so as not to change the wording of its standard Cola product. The banking relationship approach focuses on unfavourable choice, the main consequence of the imperfection of information between lenders and borrowers; But there is also the problem of moral hazard.

In general, there are two morality issues related to the capital market. First, borrowers may be lying about their financial situation and not paying off their debts in full. If the lender could not verify whether the borrower was lying, there could be no credit in the market, especially if the debt is not secured. Second, if, for example, a borrower makes a bad decision leading to bankruptcy, he does not bear the entire error, because part of the costs are borne by the bank that finances the project. As a result, the company will likely make riskier decisions if the investment is financed by a bank than if the investment is financed out of its own pocket. Economists show that these problems could be solved by an implied contract in which the borrower will have to bear certain costs if he has made the debt insolvent. The cost of the borrower`s default may be the cost of hiring lawyers and accountants to convince the lender of its emergency financial situation[13], exclusion from the capital market and future loans[14] or economic penalties if the borrower is a country. [15] However, since some of these costs will reduce the amount that will be recognized for the lender in the event of bankruptcy, the expected return is lower than that of moral risk problems.