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Trust and Adaptive Learning in Implicit Contracts

Author

Listed:
  • Christian Lukas

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

  • Jens Robert Schöndube

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

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.

Suggested Citation

  • Christian Lukas & Jens Robert Schöndube, 2008. "Trust and Adaptive Learning in Implicit Contracts," FEMM Working Papers 08017, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
    • Handle: RePEc:mag:wpaper:08017
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    More about this item

    Keywords

    trust; implicit contracts; bounded rationality; adaptive learning; trigger strate- gies; game theory;
    All these keywords.

    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; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics

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