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

Alexander Kritikos and Jonathan Tan

No 2, Working Papers from Hanseatic University, Germany, Department of Economics

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 and giving the agent 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.

Pages: 23 pages
Date: 2008-02
New Economics Papers: this item is included in nep-cta and nep-exp
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Related works:
Journal Article: Indenture as a Self‐Enforced Contract Device: An Experimental Test (2009)
Working Paper: Indenture as a Self-Enforced Contract Device: An Experimental Test (2009)
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