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

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Author Info
Alexander S. Kritikos
Jonathan H.W. Tan

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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.

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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 851.

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Length: 33 p.
Date of creation: 2009
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Publication status: Published in: Southern Economic Journal 75 (2009) 3, 857-872
Handle: RePEc:diw:diwwpp:dp851

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Related research
Keywords: Cooperation; experiment; contracts; indenture; reciprocity;

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Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
D64 - Microeconomics - - Welfare Economics - - - Altruism
J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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  6. Dufwenberg, Martin & Kirchsteiger, Georg, 2004. "A theory of sequential reciprocity," Games and Economic Behavior, Elsevier, vol. 47(2), pages 268-298, May. [Downloadable!] (restricted)
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  7. Friedel Bolle & Alexander Kritikos, 2006. "Reciprocity, Altruism, Solidarity: A Dynamic Model," Theory and Decision, Springer, vol. 60(4), pages 371-394, 06. [Downloadable!] (restricted)
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  14. Falk, Armin & Fischbacher, Urs, 2006. "A theory of reciprocity," Games and Economic Behavior, Elsevier, vol. 54(2), pages 293-315, February. [Downloadable!] (restricted)
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  15. Kritikos, Alexander & Bolle, Friedel, 2001. "Distributional concerns: equity- or efficiency-oriented?," Economics Letters, Elsevier, vol. 73(3), pages 333-338, December. [Downloadable!] (restricted)
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  17. Kritikos, Alexander S., 2000. "Indenture: an institution for a credible commitment without extortion," Journal of Economic Behavior & Organization, Elsevier, vol. 43(3), pages 397-403, November. [Downloadable!] (restricted)
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  19. Kritikos, Alexander S. & Bolle, Friedel, 1998. "Indenturing banknotes as a mechanism to induce cooperation in conflict games," Journal of Economic Behavior & Organization, Elsevier, vol. 34(2), pages 279-294, February. [Downloadable!] (restricted)
  20. Huck, Steffen & Muller, Wieland, 2005. "Burning money and (pseudo) first-mover advantages: an experimental study on forward induction," Games and Economic Behavior, Elsevier, vol. 51(1), pages 109-127, April. [Downloadable!] (restricted)
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