Trust and Adaptive Learning in Implicit Contracts
AbstractWe 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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Bibliographic InfoPaper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 08017.
Length: 36 pages
Date of creation: Jun 2008
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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; Executives; Executive Compensation
- M - Business Administration and Business Economics; Marketing; Accounting
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-09-13 (All new papers)
- NEP-BEC-2008-09-13 (Business Economics)
- NEP-CBE-2008-09-13 (Cognitive & Behavioural Economics)
- NEP-SOC-2008-09-13 (Social Norms & Social Capital)
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