Under Suspicion: Trust Dynamics with Secret Undermining. (20th June 2022)

• Record Type: Journal Article
• Authors: Kolb, Aaron; Madsen, Erik
• Is Part Of: Review of economic studies. Volume 90:Number 2(2023)
• Page Start: 912
• Page End: 947
• Publication Date: 2022-06-20
• Subjects: Principal–agent model -- Undermining -- Variable stakes -- Imperfect monitoring; C70 -- D82 -- D83 -- D86 -- M51; Economics -- Periodicals; 330
• DOI: 10.1093/restud/rdac034
• Languages: English
• ISSNs: 0034-6527

Abstract

Abstract: We study how an organization should dynamically screen an agent of uncertain loyalty whom it suspects of committing damaging acts of undermining. The organization controls the stakes of the relationship, while the agent strategically times undermining, which can occur repeatedly and is detected only stochastically. The optimal commitment stakes policy exhibits both discreteness and gradualism, with distinct "untrusted" and "trusted" phases featuring gradually rising stakes during the untrusted phase and a discrete gap in stakes between phases. This policy is also the equilibrium outcome when the organization cannot commit, and the agent's equilibrium undermining policy exhibits variable, non-monotonic intensity.