Indenture as a Self‐Enforced Contract Device: An Experimental Test

Alexander Kritikos and Jonathan Tan

Southern Economic Journal, 2009, vol. 75, issue 3, 857-872

Abstract: We experimentally test the efficacy of indenture as a self‐enforced contract device. In an indenture game, the principal signals the intention of payment on delivery by tearing a banknote in half and giving the agent one half of it as “prepayment”; the agent receives the completing half after delivering the service. By forward induction, cooperation is incentive‐compatibly self‐enforcing. The indenture performs very well, inducing a significantly higher level of cooperation than that in a three‐stage centipede game, which we use to benchmark the natural rate of cooperation. The difference between cooperation rates in both games increases over time.

Date: 2009
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https://doi.org/10.1002/j.2325-8012.2009.tb00934.x

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Working Paper: Indenture as a Self-Enforced Contract Device: An Experimental Test (2009)
Working Paper: Indenture as a Self-Enforced Contract Device: An Experimental Test (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:soecon:v:75:y:2009:i:3:p:857-872

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