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

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  • Alexander S. Kritikos

    ()
    (DJW-Berlin 10108 Berlin, Germany 8 GFA Berlin, Kufsteinroster, 10808 Berlin, Germany)

  • Jonathan H. W. Tan

    ()
    (Nottingham University Business School, the University of Nottingham, Jubilee Campus, Wollaton Road, Nottingham, NG8 1BB, United Kingdom)

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.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 75 (2009)
Issue (Month): 3 (January)
Pages: 857–872

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Handle: RePEc:sej:ancoec:v:75:3:y:2009:p:857-872

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Web page: http://www.southerneconomic.org/
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Cited by:
  1. Charness, Gary & Kuhn, Peter J., 2010. "Lab Labor: What Can Labor Economists Learn from the Lab?," IZA Discussion Papers 4941, Institute for the Study of Labor (IZA).

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