The purpose of this paper is to model trust in a principal-agent relationship in which the alternative to trusting is a costly action taken by a principal to observe and verify an agent's performance. In this model a decision not to trust is a decision to monitor rather than quit, where monitoring is recognized as one imperfect, though plausible, substitute for trust. To be precise, a principal "trusts" an agent if she assigns a task to him and then allows him to act without direct monitoring or supervision. If the principal "mistrusts" the agent, she takes a costly action to observe and verify his performance. The model also integrates the dual possibilities that a principal may fail to trust a (genuinely) trustworthy agent or mistakenly trust an untrustworthy one by examining a reliability condition that the principal must satisfy before trusting an agent, even if the agent is known to have a sufficiently high probability of trustworthiness. The reliability condition is based on the premise that the decision of whether to trust or monitor is based on a concept called relative temptation, and it reflects the extent to which an agent may exploit the principal's trust. An implication is that an agent may in fact be trustworthy in any and all circumstances but still not be trusted by a principal because of an impression or perception held by the principal. Conversely, a principal may recognize that extensive incentives exist for an agent to shirk, but still choose to trust the agent because the principal perceives the agent to have sufficiently high qualities of character to be trustworthy in that context. The relative temptation of the agent to exploit a principal's trust is assumed to be affected by two major classes of variables. The first consists of environmental factors that affect an agent's rational self-interest only, including formal rules, informal social norms, and enforcement mechanisms. This idea reflects the amoral Homo economicus - the calculating, rational, self-interested decision-maker who chooses actions based solely on salient incentives without regard for moral implication. Thus, Homo economicus is honest or trustworthy only if he has an incentive to be. The second class of variables defines the dispositions, proclivities and other qualities of the agent's character. This idea is based on Homo ethicus - a fully altruistic individual (or willing "martyr"), who sacrifices personal pleasure for the good of others or fulfills his duty even at great personal expense. Thus, Homo ethicus will be honest in spite of the incentives he faces. The relative temptation of the agent to exploit the trust of another is represented as a gap between the incentives the agent faces and the agent's personal characteristics. In general, the stronger are the environmental incentives for an agent to exploit trust, or the weaker are the agents' moral qualities, other things being equal, the greater will be the relative temptation the agent faces
