Trust and Adaptive Learning in Implicit Contracts

Christian Lukas and Jens Robert Schöndube ()
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Jens Robert Schöndube: Faculty of Economics and Management, Otto-von-Guericke University Magdeburg

No 8017, FEMM Working Papers from Otto-von-Guericke University Magdeburg, Faculty of Economics and Management

Abstract: We study e¤ects of trust in implicit contracts. Trust changes whenever the principal honors or dishonors an implicit contract. Usually a higher discount rate lowers the value of trade in an agency. We show that a su¢ ciently high level of (ex ante) trust can o¤set this ef- fect. Strategies of principals representing unique equilibria are endogenously derived given di¤erent levels of agents’bounded rationality. These strategies mirror a subset of the class of trigger strategies which is exogenously entered into previous implicit contracting models. Therefore our results o¤er some justi…cation for using that conventional approach. Implications for performance evaluation are discussed.

Keywords: trust; implicit contracts; bounded rationality; adaptive learning; trigger strate- gies; game theory (search for similar items in EconPapers)
JEL-codes: D8 D81 M M12 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2008-06
New Economics Papers: this item is included in nep-bec, nep-cbe and nep-soc
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