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Trust and Adaptive Learning in Implicit Contracts

  • Christian Lukas


    (Faculty of Law, Economics and Politics, University of Konstanz)

  • Jens Robert Schöndube


    (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)

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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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
Date of revision:
Handle: RePEc:mag:wpaper:08017
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