In praise of rigidity: The bright side of long-term contracts in repeated trust games

We study a (possibly repeated) trust game between a principal and an agent, whose skills are private information at the beginning of the relationship and later revealed to the principal.The principal can commit to a long-term relationship through a contract. We show that such a commitment may be needed for trust. Furthermore, the optimal length of the contract between the principal and the agent and the principal’s payoff are not monotonic in both the probability that the agent is high-skilled and the value of replacing a low-skilled agent with a high-skilled one.