Implicit Agreement On

An agreement between the parties on acceptable practices that are 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. As a result, the level of investment would also be lower, which would lead to loan rationing at the loan level. The capital market shares some of the „imperfections“ of the labour market discussed above: long-term relationships between banks and borrowers act as the long-term working relationship between an employer and its employees. Like layoffs in the labour market, the financial market has a credit ration. In addition, a typical loan contract is exactly like an employment contract, which is presented in the model above: the repayment of the loan is fixed in all natural states as long as the borrower is solvent.

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