Laurence Summers and the concept of "implicit contracts"

Christopher Caldwell, senior editor at The Weekly Standard, writes in today's NY Times Magazine about the use of personal information in the world of online shopping and social networking. A Harvard connection arises when he cites a 1988 paper written by two Harvard economics professors, one of whom ended up 13 years later becoming Harvard's 27th president.

The paper that Laurence Summers co-authored introduced the concept of the "implicit contract" between managers, employees, and other stakeholders (think generous employer-provided health insurance, pensions, lifelong employment, and other formerly sacred cows that are with us no longer). The focus was on the value of these contracts and how these contracts could be relatively easily revoked by new managers who come to power in the wake of a hostile takeover.

The relevance of all of this is the current situation with Harvard, the BRA, and the Allston/Brighton community. At this point we are operating under a giant implicit contract that tells the A/B community that some local good eventually make up for (and them some) the land-banking and mothballing that Harvard has been doing in our neighborhood for the past several years and we will collectively be much better off as a result of Harvard's presence in our community.

The North Allston Strategic Framework came close to making this contract explicit. But Harvard and the BRA have gone to great lengths to emphasize otherwise, saying "It was a framework but not a plan" and "I think that what’s happening is some people are interpreting those [guidelines] very strictly and it was never our sense, nor I think the city’s sense, that those guidelines were meant to be interpreted as explicit."

The contract in the Strategic Framework certainly has real value ("2,400to 2,800 new housing units", "a newly-'greened' Everett Street corridor", "creation of new parks, and improved existing parks", "transformation of Western Avenue into a more pedestrian-friendly neighborhood Main Street with streetscape and related improvements", "200,000 square feet of new and existing retail space", and more). And while Harvard and the BRA will never be the subjects to a hostile corporate takeover, Caldwell's phrase “I didn’t promise nothin’!” has a familiar ring to it.

So many people in the neighborhood are asking the BRA and Harvard to make this contract more explicit as part of the Cooperation Agreement for the Harvard Science Complex. Many of us have posted these comments on the Allston/Brighton North Neighbors Forum. Professor Summers, if he is still keeping tabs on the Allston situation, would probably understand our concerns.

Intimate Shopping - New York Times

"The concept of “implicit contracts” was developed in a landmark 1988 paper by the economists Andrei Shleifer and Lawrence Summers. Their subject — hostile corporate takeovers — seems far from cyberprivacy, but it is not. Shleifer and Summers showed that increases in share price following takeovers were not due to gains in efficiency, as the defenders of those buyouts claimed. There often were such gains, but they were not the source of the profits. The profits came from reneging on implicit contracts — like the tradition of overpaying older workers who had been overworked when young on the understanding that things would even out later. These contracts, because implicit, were hard to defend in court. But the assets they protected were real. To profit from them, buyout artists had only to put someone in place who could, with a straight face and a clean conscience, say, “I didn’t promise nothin’!”"

The Shleifer/Summers paper, "Breach of Trust in Hostile Takeovers" is summarized as follows:

Hiring and entrenching trustworthy managers enables shareholders to commit to upholding implicit contracts with stakeholders. Hostile takeovers are an innovation allowing shareholders to renege on such contracts ex post, against managers' will. On this view, shareholder gains are redistributions from stakeholders, and can in the long run result in deterioration of trust necessary for the functioning of the corporation.