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Trust and Adaptive Learning in Implicit Contracts

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Author Info
Christian Lukas () (Faculty of Law, Economics and Politics, University of Konstanz)
Jens Robert Schöndube () (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

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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.

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Publisher Info
Paper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 08017.

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Length: 36 pages
Date of creation: Jun 2008
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Handle: RePEc:mag:wpaper:08017

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Related research
Keywords: trust; implicit contracts; bounded rationality; adaptive learning; trigger strate- gies; game theory;

Find related papers by JEL classification:
D8 - Microeconomics - - Information, Knowledge, and Uncertainty
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
M12 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Personnel Management; Executive Compensation
M - Business Administration and Business Economics; Marketing; Accounting

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