Robert Rowthorn, Rajiv Sethi
Paper #: 07-01-002
This paper examines determinants of the steady state distribution of trusting behavior in a population of principals and agents, where the former learn from experience in accordance with boundedly rational procedures. For any given distribution of agent types, the long run distribution of principal behavior is characterized. It is shown that heterogeneity in the behavior of principals persists under both the sampling procedure (Osborne and Rubinstein, 1998) and the maximum average procedure (Rustichini, 2003). For the sampling procedure, we identify sufficient conditions under which greater resistance to control on the part of agents results in greater equilibrium trust among principals. We also show that the maximum average procedure, despite its greater sophistication, can result in poorer performance than the sampling procedure both from the perspective of the principal, and also with respect to aggregate payoffs.